Utilities Face the Decision Point of Big Shifts -- to Gas, Renewables and Efficiency
With or without a climate bill, electric utilities are shifting their investments to efficiency measures that cut long-term costs and integrate more natural gas and renewable energy into their power supplies, according to a new report.
"The business landscape for electric utilities is shifting quickly," says a report authored by Navigant Consulting for Ceres, a Boston-based coalition of institutional investors and environmental groups. "In turn, the traditional operating paradigm of building large generation facilities to sell ever-increasing amounts of electricity is changing."
The report says drivers of this shifting paradigm include the need to cut greenhouse gas emissions by as much as 80 percent by 2050 and policies in many states making it costly to build more fossil fuel-based electric generation.
The report says costs for renewable energy are coming down significantly, and regulatory policies now allow utilities to count large-scale energy efficiency as the lowest-cost energy resource. Further, utilities are adopting "smart grid" technology to help manage electricity use, and there is more interest in developing plug-in electric vehicles.
Navigant and Ceres also talked about boosting natural gas in the fuel mix for electricity generation.
"Recent technological breakthroughs in extracting natural gas from shale and other 'tight' formations have led to a startling reassessment of the nation's natural gas supplies, previously thought to be dwindling," says the report. "Natural gas is positioned to play a growing role as a complement to variable renewable energy resources. In addition, natural gas can help optimize overall energy efficiency by integrating thermal and electric technologies and end-uses."
Coal, according to this report, faces an array of challenges. Most U.S. coal-fired power plants are at least 30 years old. New U.S. EPA regulations to cut emissions of haze and ozone-causing nitrogen oxides, sulfur dioxide, mercury and other pollutants are expected to push many of those old plants into retirement. Citing a March 2010 study by Bernstein Research, the report says the EPA regulations will likely force the retirement of about one-quarter of U.S. coal-burning generation by 2015.
Mass cancellations of coal-fired plants
The report also counts that 120 coal-fired power plant projects were canceled over the last decade because of environmental and financing issues. Another 50 plants face lawsuits from parties attempting to halt their construction or operation.
There also is mounting evidence that coal as a commodity will become more expensive, according to Navigant and Ceres. They note that a 2008 U.S. Geological Survey study of the Powder River Basin coal fields in Wyoming found that the economically recoverable reserves might be only 6 percent of previous estimates, "raising questions about the long-term price and availability of coal in other areas of the U.S."
Tom King, president of National Grid USA, a major gas distributor and electric utility in New York, New Hampshire, Massachusetts and Rhode Island, said coal will always be a part of the fuel mix in certain regions because of its abundance. But in an interview with ClimateWire, he emphasized that the priorities of electric utilities are changing. "Natural gas for the foreseeable future remains a reliable source," he said. "The policy ought to be that we extract the gas."
King's support for using gas for power generation is notable. For years, industrial users of gas and local distribution companies such as National Grid discouraged talk about using more gas for electricity generation. The concern was that it would increase competition for natural gas and drive up the commodity price. Now, as King noted, there is broad awareness that expanding U.S. shale gas fields have dramatically increased the gas supply. One of the hottest gas basins, the Marcellus Shale, sits in his backyard in the Northeast.
A favorable gas price outlook
The natural gas supply, though, depends on favorable gas prices. An analyst at the energy consultancy Wood Mackenzie told delegates at the 2010 Energy Epicenter conference in Denver that U.S. natural gas prices will increase to a range of $6.50 to $7 per million British thermal units (MMBtu) as cost pressures intensify in the next five years. That's around the place that many gas drillers say is needed to sustain production. Natural gas has hovered around $4/MMBtu for more than a year.
Those costs include competition for rigs, the cost of major oil services companies working with gas companies to produce shale gas, and a higher-cost economy. "The core, low-cost unconventional gas plays -- Marcellus, Haynesville and Barnett -- will continue to grow, but within a few years, as the pace of demand growth accelerates, more expensive shale and tight gas supplies will be required," said Jen Snyder, the principal natural gas analyst for Wood Mackenzie. "Economywide inflationary pressures mean that, in nominal terms, prices could reach $8.50/MMBtu."
She added that even in the absence of climate legislation that increases the cost of coal-fired generation, EPA and state regulations could lead to 45 gigawatts of coal-fired power generation being retired by 2020. That would stimulate about 5 billion cubic feet a day of gas demand.
The electric power sector accounts for about 40 percent of U.S. and global carbon dioxide emissions. Cutting those emissions by cutting energy use has been strategy No. 1 for much of the industry, according to this and other recent reports.
But Navigant and Ceres say there are still fundamental hangups to achieving efficiency's full potential: there is a lack of broad enough regulatory support; the utility-sector business model based on electricity sales remains largely in place; and power transmission capacity limits the amount of renewable energy that can be integrated into the system.
"A utility that deals effectively with these trends, and receives sufficient support from regulators and legislators, will be better positioned to success in the 21st century," says the report. "All else equal, such a utility is also more likely to attract lower cost capital, enabling it to earn stronger returns for investors."