Black & Veatch Sees 75% Price Increase for Power by 2030 if President's Clean Power Plan is Implemented

Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Wholesale electricity prices in the U.S. will jump about 75% by 2030 if President Obama's Clean Power Plan to limit carbon dioxide emissions from coal-fired power plants is implemented, Neil Copeland, director of the management consulting practice at Black & Veatch (B&V) (Overland Park, Kansas), told listeners on a webcast January 28. U.S. wholesale electric prices currently average about $42 per megawatt-hour (MWh), but B&V expects those prices are expected to average about $75 in 2030, measured in 2014 dollars.

B&V's analysis of strategic trends in the energy industry is part of the firm's semi-annual "Energy Market Perspective," which looks out over a 25-year horizon at supply, demand and prices for electricity, natural gas and crude oil.

If President Obama's Clean Power Plan is not enacted, wholesale electric prices will average about $52 per MWh in 2030, he added. The Clean Power Plan, proposed under the authority of Section 111 of the Clean Air Act, seeks to lower U.S. power plant emissions of carbon dioxide (CO2) from existing power plants by 30% from 2005 levels by 2030.

The U.S. Environmental Protection Agency (EPA) (Washington, D.C.) released its draft rule last June, and a final rule is expected this summer. The plan and the draft rule have been extremely controversial within the Power industry, as they propose an emissions standard for existing coal-fired power plants that can only be met by installation of carbon-capture equipment. For more on this plan, see October 21, 2014, article - U.S. Power Industry's Regulatory Future, Part One: Clean Power Plan, Coal Combustion Residuals Stir Legal Fights, and June 3, 2014, article - EPA Releases Draft Carbon Dioxide Emissions Rule for Existing Power Plants.

This new rule, if it is enacted and survives the inevitable court challenges, will accelerate the trend of coal-fired power plant retirements that have been under way for several years, Copeland told the January 28 webcast. The consulting firm sees coal-fired power plant retirements totaling 40 gigawatts (GW) in the Eastern U.S. by 2020, mainly due to the effect of another EPA rule, the Mercury and Air Toxics Standard (MATS), which seeks to lower mercury emissions from power generators. Copeland sees a second wave of coal-plant retirements after 2030, also mainly in the East, as plants reach their average life expectancy of about 65 years.

Copeland sees natural gas combined-cycle (NGCC) generation adding between 60 and 70 GW during the 2020s, mainly to meet new load growth.

Wind power also will do very well if the Clean Power Plan becomes law. Over the next decade, Copeland told listeners, wind capacity in the East is expected to nearly double to more than 75 GW. The West will add more than 6 GW of wind over the next 10 years while the Electric Reliability Council of Texas (ERCOT) is expected to add another 8 GW of wind power by 2025.

"Because it is an intermittent generator, wind is not a replacement for base load capacity," the B&V consultant noted. "In fact, it's not always the most economical option. But it does offer utilities an opportunity to provide cleaner generation to their customers." He said there were still a number of uncertainties about how interstate sales of wholesale wind power would be treated under the president's Clean Power Plan: Would the generator be allowed to claim credit for that carbon-free generation, or would the utility buying the power take credit?

B&V sees a similarly robust growth market for solar power over the next decade: In the East, capacity will more than double to over 12 GW by 2025. In the West, solar capacity will nearly double, to over 25 GW by 2025. But ERCOT will face limited demand growth for solar generation over the next decade.

Copeland said that coal is expected to remain an important part of the U.S. generation mix. But the firm's projection shows coal's share of the Lower 48 states' net dependable capacity mix falling to 14% by 2039, down from 26% today. Net dependable capacity is the amount of capacity that can be bid into formal capacity markets or be counted on toward the planning reserve margin, Copeland explained.

Click on the image at right to see Black & Veatch's projection of coal's declining share of net dependable generating capacity in the Lower 48 states.

Coal's future is a bit brighter when looking at actual electric generation, rather than net dependable capacity, Copeland said. In 2015, coal is expected to generate about 39% of all the electricity used in the Lower 48 states. By 2039, that share is expected to fall to 26%, he predicted.

Click on the image at right to see Black & Veatch's projection of coal's share of actual electricity produced in the Lower 48 states.

Copeland's colleague, Denny Yeung, a principal in B&V's management consulting practice, laid out the firm's view of crude-oil and natural gas supply, demand and prices. He said lags in crude-oil drilling typically occur about 200 days after a major price decline. For gas, the lag time is shorter--an average of 120 days, he said. Prices for both fuels have declined since September, but oil's slide is more pronounced.

Click on the image at right to see a comparison between price declines for natural gas and crude oil since September 2014.

Yeung said the market is "somewhat saturated with gas," and overall production from shale formations will be fairly flat this year compared with 2014. But he sees a near doubling of shale gas production by 2039--to about 70 billion cubic feet per day (Bcf/d), from about 38 Bcf/d this year. Over that time, he expects demand to also double.

He sees strong demand growth for gas among electricity generators, who will increase their use of that fuel about 20%, of 5 Bcf/d, by 2020. Over time, demand growth is expected to be particularly strong among power generators, whether or not the Clean Power Plan is enacted, he added.

Yeung predicted gas prices at Henry Hub will remain below $5 per million British thermal units (MMBtu) through 2020, measures in 2014 dollars. But crude oil prices "have not yet bottomed out," he added, predicting a price for West Texas Intermediate (WTI) crude of between $40 per barrel and $42 per barrel this year. Prices will rise to an average of $56 per barrel by 2016, and "close to the $70s by 2017," he projected. Next-month futures contracts for WTI closed at about $46 per barrel last Friday.

Global crude oil prices have fallen by more than 50% since last June. Yeung said the price collapse will lead to a "fairly high" reduction in production, leading to higher prices in the out years. If crude-oil production typically lags about 200 days after a major price drop, the industry should be seeing production numbers trend downward in the coming weeks and months.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.