Black & Veatch: U.S. Energy Markets to Get Gassier, Greener

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--The U.S. electricity mix will get greener and gassier during the next 25 years, but continued growth of natural gas production from shale formations will moderate gas price increases in the near term, according to an energy market outlook released by Black & Veatch (B&V) (Overland Park, Kansas) last week. As natural gas evolves into the predominant fuel in electricity generation, power prices will increasingly be tied to gas prices, Rob Patrylak, managing director of B&V's Planning and Energy Markets service, said in a web conference July 31.

Federal regulations, mainly the Mercury and Air Toxics Standards (MATS) and the recently announced Clean Power Plan, will close about 60 gigawatts (GW) of coal-fired generating capacity by 2020, Patrylak said in discussing B&V's semi-annual Energy Market Perspective.

"That's 20% of the existing coal fleet, but that means 80% of the coal fleet will still be operating," he said. "Coal will continue to have a significant role in the (electricity) mix."

Most of the coal plant retirements--about 45 GW, almost all of them located in the Eastern Interconnection--are projected to take place between now and 2015, which is the MATS compliance deadline, he added. U.S. coal-fired generation is projected to fall from 296 GW this year to 237 GW in 2025, and 176 GW in 2038, B&V projected.

Click on the image at right to see B&V's projection of changes in the U.S. electric generating capacity from 2014 through 2038.

Over that 25-year horizon, gas-fired, combined-cycle generating capacity will more than double, from 223 GW to 477 GW in 2038. Combustion-turbine generation will rise about 50% over the same period. Wind-based generating capacity will more than double to 140 GW in 2038, from 68 GW in 2014.

On an energy basis, about 47% of U.S. electricity will be generated by gas-fired, combined-cycle generators in 2038, up from about 22% today. During the next 25 years, the percentage of electricity generated by coal will fall from 44% this year to 25% in 2038, B&V forecast.

Patrylak said President Barack Obama's Clean Power Plan, announced June 2, may lead to the development of multi-state markets for carbon dioxide (CO2) trading, similar to the Regional Greenhouse Gas Initiative (RGGI) in the Northeast.

"A mass-based approach like RGGI could work for several regions," he added. But he cautioned that the industry is still scrambling to understand the details and implications of the president's initiative. "There's quite a bit of room (in that proposal) for assumptions," he said. For more on the president's proposal, see June 3, 2014, article-- EPA Releases Draft Carbon Dioxide Emissions Rule for Existing Power Plants. For more on RGGI, see July 7, 2009, article- Carbon-Dioxide Allowance Trading Taking Shape in Northeastern U.S. California implemented a carbon-trading market as part of climate change legislation adopted in 2006.

Black & Veatch's projection assumes a greenhouse gas emission allowance price of $12 per ton in 2020, rising to about $38 per ton in 2038. The firm assumes allowances will be distributed to producers through a combination of auction and allocation mechanisms.

Patrylak said that coal's prospects would be helped if gas prices increased sharply or an economic way was found to capture and sequester CO2 emissions. But he did not seem to hold out a lot of hope that either would happen. Still, Patrylak said, "coal will continue to have a significant role in future electric generation."

During the next quarter-century, nuclear energy's share of the capacity and energy mixes also will slide, he continued: "Nuclear plant economics are becoming more challenging in a low-cost gas environment, and this will continue in the absence of a price on carbon." Nuclear's share of electric capacity is forecast to fall about 36%, to 62 GW in 2038 from 97 GW today. On an energy basis, about 10% of the nation's electricity will come from nuclear power in 2038, down from about 19% today.

On a business-as-usual basis, increased demand for natural gas for electric generation will add about 5 billion cubic feet per day (BCF/d) of new demand by 2020, and nearly 15 BCF/d by 2038, Ann Donnelly, director of B&V's Natural Gas & Power Fuels Practice, told the web conference July 31. Beyond this baseline projection, enactment of federal CO2 regulations could add another 3 to 5 BCF/d of new demand by 2020, and the retirement of nuclear generators could add a further 7 BCF/d of new gas demand for the 25-year forecast period.

Exports of liquefied natural gas, expected to begin in 2016, could add another 14.7 BCF/d to gas demand by 2025, Donnelly said. Most of those exports are scheduled to take place in the Gulf Coast, though Western Canada and Alaska are expected to get into the liquefied natural gas (LNG) export game in 2017 and 2023, respectively. And those estimates could go higher if European and Asian nations rethink the wisdom of reliance on Russia for their gas: "As we have seen in the Ukraine, Russia has a credibility problem," Donnelly said.

Click on the image at right to see B&V's projection for U.S. LNG exports.

All told, B&V expects U.S. natural gas production to increase by more than 60%, to about 138 BCF/d in 2038 from about 85 BCF/d today, as hydraulic fracturing and horizontal drilling unlock new gas deposits, as well as coax more gas from mature existing formations. But the surge in production is expected to keep gas prices at Henry Hub under $5 per million British thermal units (MMBtu) for the next five years, measured in 2014 dollars. After that, the trajectory of gas prices depends on whether the federal government levies a fee on carbon emissions. A $12 per ton fee on carbon emissions would push up gas prices by about 70 cents per MMBtu, Donnelly predicted.

Click on the image at right to see B&V's projection of rising gas production during the next 25 years.

Patrylak and Donnelly acknowledged their forecasts could be affected by future legal, market and technology shifts. Donnelly said higher natural gas prices; a breakthrough in energy storage; development of ways to cost-effectively capture and sequester CO2; and the ability to cost-effectively develop methane hydrates on the ocean floor all could fundamentally change the future direction of energy markets. Patrylak added that enacting a price for CO2, discovering a new technology that lowers the cost of nuclear power, and breaking the logjam over nuclear waste storage are developments that have the potential to shift the outlook for the U.S. electric market.

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.