What ever happened to the 1990s theory that natural gas would displace the market share of coal and nuclear for power generation?
The answer, quite simply, is that natural gas has never been more expensive, in the process losing its competitive edge against cheaper coal and nuclear baseload generation. The Natural Gas Week composite wellhead price for 2004 was $5.77/MMBtu, the highest on record.
Soaring prices have poked holes in the view that gas would displace the market share of coal or nuclear fuel for power generation. Natural gas needs a ceiling of about $4/MMBtu to be competitive with coal and nuclear, according to Jerry Eyster, managing consultant with PA Consulting. Until prices fall, natural gas as a fuel for power generation likely will be relegated to second or third fiddle in most regions as a choice for power supplies, Eyster said. While many in the industry believe natural gas has room for growth for power generation, it will not supplant or replace coal and nuclear as a baseload generation source.
“Gas is $7 for a reason - there is no incremental supply,” said Chris Ellinghaus, a power and gas analyst with Williams Capital Group. Ellinghaus said high gas prices, driven by tightening supplies, have reduced the capacity at which combined-cycle plants are being run from 75% in 1999 to an average of no more than 60% today.
“Certainly gas was regarded as the great savior of the late 1990s and in early 2000, but not really much beyond 2001 when the merchant sector began to implode,” said Jim Owen, spokesman for the utility trade group Edison Electric Institute. During the 1990s, the presumption in the electric industry was that nuclear and coal plants, operated by heavily regulated utilities and facing mounting environmental concerns, would fare poorly in deregulated power markets. Neither theory has been borne out. According to the Energy Information Administration, planned coal plant retirements at US utilities from 2001 through 2005 totaled a mere 10 units, or 660 MW. But the possibility of clean-coal technology has sparked the interest of private investors and spawned thousands of megawatts of proposed capacity additions over the next several years (NGW Dec.20,p8).
Nuclear plants meanwhile were sold off to private investors, consolidating ownership among the most efficient operators. Under deregulation, the nuclear industry has increased capacity factors while cutting maintenance downtime, allowing nuclear units to produce more electricity. Capacity factors have jumped from 58.5% in 1980 and 70% in 1990, to 91.7% in 2002. The average refueling outage has fallen from 105 days in 1990 to 37 days in 2001.
Of the 103 nuclear reactors in the US, 14 have renewed their licenses, 16 have filed with the Nuclear Regulatory Commission for license renewals, and over 20 have officially informed the NRC that they expect to apply for license renewal over the next four years. Ellinghaus of Williams Capital, however, remains bullish on the prospects for natural gas in power generation markets. “Just because we have a temporary oversupply of electricity doesn’t mean it is going to last for long,” Ellinghaus said. “I think we only have another three to four years of excess natural gas for power - that will partly be determined by economic growth,” he said.
