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Electric industry must plan now for increased natural gas generation
by Bob Shively, Enerdynamics President and Lead Instructor
The U.S. electricity industry appears to be in the midst of a long-term transformation from coal-dominated output to natural gas-dominated output. In the 10-year period ending with 2012, natural gas generation increased from 17% to 30% of electric output. According to the North American Electric Reliability Corporation (NERC) the current gas-generation capacity of about 400,000 MW will increase by an additional 132,000 MW by 2020, and consultancy Black and Veatch forecasts that gas generation will double in the next 25 years.
Yet amazingly enough, in Black and Veatch’s 2013 Strategic Directions in the U.S. Electric Utility Industry survey, only 7% of electric utilities indicated that they have fully planned for the increased demand on their regional gas pipeline system, and more than 35% indicated they were only in the initial planning stages or have yet to start planning. Not surprisingly, only 32% of respondents indicated that they were confident in the medium- to long-term adequacy of pipelines within their utility’s regional grid.
Source: NERC, 2013 Special Reliability Assessment: Accommodating an Increasing Dependence on Natural Gas for Electric Power, May 2013, p. 7
This uncertainty poses a clear risk for the electric industry and a strong opportunity for natural gas companies. Reliability of fuel supply for gas-fired generation is a combination of supply availability, pipeline capacity, and local storage capacity. Recent growth of North American natural gas supply has been well documented, and the outlook for ongoing supply strength appears robust. Much less attention has been paid to pipeline and storage infrastructure. Localized weaknesses in New England and New York have already lead to significant price spikes during periods of peak demand, usually driven by extreme cold weather. And Black and Veatch believes other system weaknesses may exist in Florida, the Upper Midwest, Southern California, and Texas.
Avg. Natural Gas Spot Price February 2013 ($/MMBtu) with Mainline Pipelines
Unlike the electricity business in which transmission construction is still driven by centralized reliability planning, the gas pipeline and storage industry is largely driven by market forces. For interstate facilities, FERC issues certificates for construction based on a project owner’s willingness to take the market risk of spending money to build projects. Thus revenue for pipeline and storage owners is not guaranteed through rate recovery. Rather it is dependent on the project owner’s ability to contract with users who are willing to make long-term firm commitments ensuring sufficient revenue to finance what are multi-million or even multi-billion dollar projects.
Such long-term commitments can be difficult for market participants since market conditions can change quickly and long-term commitments that seemed prudent can prove to be uneconomical. This is especially difficult for electric companies since it is difficult to project the run hours for a power plant many years in advance.
The Interstate Natural Gas Association of America (INGAA) testified recently before the U.S. Senate that more than $8 billion per year is needed for U.S. and Canadian gas midstream infrastructure. While not all of this is needed for the electric industry, much of it is. And gas pipeline and storage owners are going to expect the electric industry to commit to get it built. For the 93% of electric utilities who indicated they had not fully planned for the increased demand on their regional gas pipeline systems, it is time to get future gas infrastructure capabilities figured out!
Do you or your organization need to learn more about gas infrastructure and delivery issues? Enerdynamics’ natural gas courses can be customized to provide just the information you need. See our offerings at www.enerdynamics.com or call us at 866-765-5432.
1. See EIA Annual Energy Outlook 2013 Issues in Focus: Competition between coal and natural gas in the electric power sector. Available at: http://www.eia.gov/forecasts/aeo/IF_all.cfm#coal_gas
2. NERC, 2013 Special Reliability Assessment: Accommodating an Increasing Dependence on Natural Gas for Electric Power, May 2013, available at http://www.nerc.com/pa/RAPA/ra/Reliability%20Assessments%20DL/NERC_PhaseII_FINAL.pdf
3. See Black and Veatch’s 2013 Energy Market Outlook and Industry Trends, p. 16, available at http://bv.com/docs/reports-studies/2013-energy-market-outlook-and-industry-trends.pdf
4. Black and Veatch, 2013 Strategic Directions in the U.S. Electric Utility Industry, p. 41 available at http://bv.com/reports/2013-electric-utility-report
5. For example, see our Enerdynamics’ blog on the Rockies Express pipeline: http://blog.enerdynamics.com/?s=rockies+express
6. See: http://www.energy.senate.gov/public/index.cfm/files/serve?File_id=589c9970-451a-4ad5-bb97-b3f5a54d6834, p 2.