Development of Natural-Gas-Fired Generation Increases in the U.S.

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Written by Britt Burt, VP Power Industry for Industrial Info Resources (Sugar Land, Texas)--Over the past decade, the development of new natural-gas-fired generating assets has been similar to an amusement park roller coaster ride, in that there have been very high peaks, the lowest of lows, and fast and furious activity from one point to the other. The Power Industry is experiencing a growth period in terms of constructing new natural-gas-fired generating capacity. Since the bottom fell out in 2005, new construction activity for gas capacity has grown at a pace of more than 20% per year, and while we do not expect new construction activity in 2009 to surpass last year, the number of projects under development continues to grow. Right now projects currently on the books for kickoff by the end of the year could represent a 52% increase in construction kickoffs over the previous year.

Click on image at right for a regional breakdown of active U.S. natural-gas-fired projects.

While the spotlight continues to shine most brightly on renewable energy, natural gas has once again become an attractive fuel choice for new generating assets. For the past few months, natural gas prices have followed a downward trend across the nation. The electric power price for natural gas has declined nearly $3 since November 2008. One of the key factors behind lower prices is an overall decrease in demand for the fuel. Total natural gas consumption is projected to decline 2.3% in 2009, which includes an 8.2% drop among industrial users this year. Lower demand has led to increased reserves in storage, also contributing to lower natural gas prices. For the week ending July 10, 2009, reserves were at 2.89 trillion cubic feet, which is 19% above the five-year average of 2.43 trillion cubic feet. Lower demand for natural gas coupled with increased reserves creates an environment for price stability, leading to natural gas becoming an attractive fuel for developers of new generating assets.

At present, there are 155 simple-cycle and combined-cycle units representing more than 20,000 megawatts (MW) of natural-gas-fired capacity under construction in the United States. All of these units are part of projects that are scheduled to begin commercial operation between 2009 and 2012. These projects represent almost 17,000 MW of capacity from combined-cycle units and more than $12 billion in capital investment, while the simple-cycle projects represent total spending of $1.75 billion. These projects include the 600-MW Bear Garden project in Virginia being built by Dominion Energy (NYSE:D) (Richmond, Virginia), which is scheduled for completion in 2011, and the first 1,100-MW phase of the 3,300-MW West County Energy Center in Florida being built by Florida Power & Light Company (Juno Beach, Florida), part of FPL Group Incorporated (NYSE:FPL) (Juno Beach), which is scheduled for startup later this summer.

So far this year, there have been 47 natural-gas-fired units, representing almost 6,000 MW, that have started construction. These projects represent a total investment of more than $4 billion. For the balance of the year, there remain 95 units and 9,000 MW that have a construction kickoff date scheduled. Of this, total projects set to supply 1,700 MW are in the advanced development stages, meaning permits and financing are in place. The remaining projects are still in development and could fall casualty to permitting delays or lack of financing.

Beyond 2009, Industrial Info is so far tracking 423 units and 53,000 MW of natural-gas-fired generating capacity that is in the development stages. This total capacity includes 74 projects valued at more than $20 billion and scheduled for construction kickoff during 2010. As a component of these projects, there are 238 combined-cycle and simple-cycle units being proposed, which would result in the addition of 25,000 MW of total capacity. The vast majority of these projects are being developed as power projects, meaning their primary purpose is power generation, but there are also grassroot plants and plant expansions in industries such as petroleum refining, petrochemical processing and others that have a power unit included. One of the projects scheduled for kickoff next year is JEA's (Jacksonville, Florida) $430 million Greenland Energy Center that is proposed to be built off Phillips Highway in Jacksonville. Construction kickoff is anticipated to begin in early 2010, with simple-cycle operation expected in the summer of 2011. There are future plans to convert the plant to a combined-cycle facility.

At this juncture, it appears that the development of new natural-gas-fired generating units will continue for the foreseeable future with construction starts planned for more than 17,000 MW in 2011 and 8,000 MW on the books for construction kickoff in 2012. As time moves forward, it is expected that even more projects will be identified that have construction activity planned to begin during this same time period.

Overall, the outlook for development of new natural-gas-fired generating assets appears to be promising. For the near term, we are seeing a downturn in electricity demand as retail sales of electricity in the industrial sector have fallen 12% during the first quarter of 2009 compared to 2008. Total consumption of electricity is expected to fall 2% for the entire year of 2009 and then increase almost 1% during 2010. However, beyond 2010 there is anticipation in the industry that the U.S. will be in a position in which an additional 15,000 MW or more will need to start commercial operations each year in order to meet increased demand for power. This new capacity will not only be needed to meet future demand, but also to replace capacity lost from older units scheduled for retirement.

Another key issue driving the necessity for new natural-gas-fired generating capacity is the fact that development of new coal-fired assets is in a state of limbo. While it is true that a significant amount of new coal-fired generating capacity is under construction, the future of this sector of the power industry is uncertain. During the past two to three years, there have been multiple project cancellations and delays for new coal-fired power projects. This has been caused in large part by the increased capital costs of building new units as well as uncertainty about the environmental mandates in regards to carbon-dioxide emissions. This uncertainty, coupled with the idea that any new capacity from new nuclear plants is five to seven years away, opens the door for natural-gas-fired generation to bridge a major gap.

In conclusion, while activity to build new natural gas fired units has not reached the crescendo of the early 2000's, we are entering another period of growth for this sector of the industry. Could this spell déjà vu all over again?

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Industrial Info Resources (IIR) is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy related markets. For more than 26 years, Industrial Info has provided plant and project opportunity databases, market forecasts, high resolution maps, and daily industry news.