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Gas-Fired Power Generation USA: Market Report

Successfully plan, upgrade and operate your generation eet with knowledge on the outlook for gas-red generation Robert Imonikhe

Successfully plan, upgrade and operate your generation eet with knowledge on the outlook for gas-red generation - Robert Imonikhe
CONTENTS Market review Introduction to interviewees Donald Santa INGAA Richard Levitan Levitan Associates Rick Smead RBN Energy Gordon Pickering - Navigant Final Remarks Page 3 Page 4 Page 5 Page 8 Page 12 Page 16 Page 18
NATURAL GAS POWER GENERATION

May 19-20, 2014 | Chicago, Illinois Successfully Plan, Construct, Upgrade and Operate a Gas-red Generation Facility www.gaspowerevent.com

Market Review
The natural gas revolution has dramatically altered the nature of US power generation. In 2012 the US generated 30 per cent of its electricity from natural gas, up from 24 per cent in 2010. Some projections indicate that, continuing at its current pace, electricity generation from natural gas in the US will double in ten years. According to U.S. Energy Information Administration (EIA), natural gas red generation will comprise 75% of new capacity additions between 2012 and 2016. Net generator additions will total 120 over the period, with the largest projects due to come online in 2015. A signicant concentration of coal plant retirements up to 2022 are planned in the Mid-Atlantic, Ohio River Valley and Southeast US, supporting expectations that natural gas will continue to gain market share in these areas. A handful of major companies have been at the forefront of development in the sector. Calpine, among the biggest U.S. producers of electricity from natural gas, has signicantly expanded its footprint to capitalize on favorable market dynamics. Also among those investing heavily in gas-red generation are Southern Company, Next Era, Duke and nancial players such as Panda Power Fund and LS Power. Technological, environmenal and regulatory advantages support the preference for natural gas over other generation technologies. One of the major technological benets is the exibility of natural gas generation compared to renewable sources such as wind and solar. Natural gas turbines can be quickly ramped up to ll the gap in output when these sources are idle. Another key advantage is the higher efficiency of gas power plants, particularly compared with coal plants. Partly because of this, gas is competitive with coal even when it costs 1.5 times as much. The environmental benets of gas have lead to its favourable treatment by regulators. In order to comply with new EPA emissions standards, new coal plants (and in 2014, existing ones) must install carbon capture systems (CCS). Natural gas power plants fall within the emissions standards, so do not need to take on this additional investment, which has made some planned and existing coal plants uneconomical. However, in future it is not inconceivable that regulators will further reduce allowable emissions from gas-red plants, necessiting the use of CCS. While the benets of natural gas for generation appear overwhelming, there are background concerns that some fear if not dealt with will continue to pose challenges. Infrastructure capacity has manifested as a key issue in parts of the US, prompting regional bodies to investigate requirements for new development. In addition, alternative uses of natural gas: NGVs, petrochemicals etc. will have some impact on market dynamics, potentially leading to increased pricing of natural gas. These, among other issues, are addressed in detail by the contributors to this paper. On the whole they paint a positive picture for the future of gas-red generation, while frankly conveying the key issues that must be overcome to cement long-term success.


Introduction to interviewees...
Donald Santa President and CEO | Interstate Natural Gas Association of America Donald F. Santa, Jr. is the President and CEO of the Interstate Natural Gas Association of America (INGAA), the North American association representing the interstate and interprovincial natural gas pipeline industry. Richard Levitan President and Principal | Letivan & Associates Richard leads the rms advisory services in the areas of power plant valuation, wholesale power procurement, pipeline / storage adequacy assessment, rate design, and asset acquisitions. Mr. Levitan has 34 years of industry experience in pipeline transportation management, nance, regulation, and wholesale market analysis. Rick Smead Managing Director|Advisory Services | RBN Energy Rick Smead is Managing Director, Advisory Services, for RBN Energy LLC, an analytics and consulting rm based in fundamentals in the natural gas, oil, and natural gas liquids industries. He specializes primarily in the natural gas sector, offering expert policy analysis and advice, litigation support, and strategic advice with respect to gas pipelines, potential supplies, and market initiatives. Gordon Pickering Director | Energy | Navigant Gordon Pickering a Director in the Energy practice, with over 28 years of energy marketing and consulting experience in the wholesale natural gas and power industries in the United States and Canada. His energy career has encompassed over a decade with a major oil and gas producing company, seven years with a large natural gas marketing company and several years in deal origination' for an investor owned electric utility.


Donald Santa INGAA Where are the worst areas with constrained pipeline capacity for natural gas - why are these areas specically bad?
I think theres two ways to look at it, constraints on the upstream (in other words constraints preventing producers from getting their gas to the market) and then on the downstream end (constraints precluding consumers from getting gas). One of the areas people point to (upstream) is Bakken shale and the amount of gas that is getting ared there because its being produced in association with oil production. I think my understanding there is that really the impediment is not so much natural gas transmission pipeline capacity as it is gathering and processing capacity. I think some of that has to do with a combination of factors that include the remote locations of the production and the fact that with natural gas being priced at such a discount to oil, the question of whether for some of those producers its worth making the investment needed to support building out the processing and gathering. So I think the challenges there are probably more just the simple economics. Downstream I think the area that gets the most attention is New England and I think there youve got a number of factors that have come to a conuence. Number one, New England is one of those regions historically at the end of the pipe. Its a region that does not have any indigenous gas supply nor does the geology support gas storage. Next, there are transmission pipelines that feed New England both from the west and from the east. The pipes from the east come in from the Canadian Maritime provinces and offshore production has been nowhere near as prolic as people hoped it would be. Some of that capacity was built on the anticipation that you would have LNG coming in and then that would be the gas that was getting transported to New England. And so on the east the issue is that youve got the pipeline capacity but you dont have the supply. From the west youve got the problem that there just is inadequate pipeline capacity in part given the fact that if you went back eight to ten years people were assuming there would be more supply coming in from the east. There are also the issues with the electric power market and New Englands heavy dependence on natural gas red generation. Because of the way the market has been restructured there with the generation being fully divested from the utilities, there is little or no incentive for generators to sign up for pipeline capacity, because of their inability to recover those costs in the market. So you have the generators and those who supply the generators really relying very heavily on secondary market capacity, which is the capacity thats held by the natural gas local distribution companies. The concern there is that during periods of peak demand, when of course the local distribution companies are going to be fully utilizing their capacity to serve customers, whats left over for the generators? In addition, the rules in the power markets do not support the generators or those serving and making the investments to hold primary pipeline capacity. The bottom line is the way the electric markets are structured its difficult for the generators to recover those costs and even in electricity markets where theyll receive some form of capacity payment, the capacity payments typically are for a relatively short duration, maybe one to three years. Of course that doesnt match up with the fact that typically to hold pipeline capacity you have to enter in to a multi-year contract. Even more so, if you need to be one of the anchor shippers for new pipeline capacity, the pipeline is typically going to be looking for a ten to fteen year contract. That just doesnt match up with the ability of the electricity generator to make the capacity payments.


What is being done: how can this issue be resolved and who needs to be involved in the process?
New England is a region that historically has been fairly heavily dependent on fuel oil for home and residential and commercial space heating. And given the signicant cost advantage that gas now has over oil youre seeing a lot of the local distribution companies expanding their customers and therefore needing more pipeline capacity and so there are a couple of projects that have been proposed to expand capacity in to the region. Again though, its driven primarily by local distribution companies signing up to meet obligations for expanding residential and commercial load. That conceivably creates more secondary market capacity when the distribution companies dont need it but doesnt solve the peak day problem when theres a coincident peak. The ISO up there is working on some market reforms and in particular trying to put more value in the capacity market to reward performance, although even the ISO concedes that if successful it is not going to create a sufficient incentive for generators to sign up for pipeline capacity. So it comes down to either the states getting involved or obligating electric distribution companies, who have got captive customers and charge cost based rates that are regulated, to sign up for or have some cost responsibly for the pipeline capacity. You can make argument that electric customers would benet from increased reliability and the opportunity to get the gas at a competitive price.
Which pipeline operators have recently (or are currently) investing in new infrastructure to serve this growing market where is this concentrated and how did it get agreed?
There are two projects that have been proposed. Spectras Algonquin and the Tennessee Gas Pipeline, owned by Kinder Morgan. Theyve got a project that is not quite as fully developed as the Spectra project but they are marketing a project to expand their capacity.
How can US power generators avoid a repeat of the situation in the North East (lack of transmission capacity and price spikes)?
I think the question that people are asking is to what degree is on the one hand New England a very unique situation for some of the reasons I mentioned, versus to what degree is it a canary in the coal mind or a harbinger of things to come in the electric power market and the dependence on gas? I think that while all of the markets are to some degree unique, when you look at the amount of anticipated retirements of coal red generation and the assumption that natural gas will ll that void in most instances, a number of regions are in the process of looking at the pipeline capacity and the adequacy to meet the need. Then the real question is if you conclude that you need more pipeline, who pays for it? Theres a study that has been initiated (funded by the Department of Energy) by EIPC and they are going to look at all of the organized markets to investigate these infrastructure compatibility issues. The Midwest ISO (now the Midcontinent ISO) did its own study series a while back and concluded this year. They are in a little bit of a different situation in that their region has got a multiplicity of pipelines, most of which are not fully utilized and while some new infrastructure might be needed, its probably more incremental. The other issue is to the extent to which the electric power generation is still owned by integrated electric utilities, theres the ability to recover the pipeline cost in the rates that are set by the state public service commission. Thats another factor; whether you are dealing with merchant generators who are reliant upon the market price or with integrated utilities that, if they can make the case that the pipeline capacity is needed to serve the generators, they can get it recovered as part of their regulated rates.


The interesting contrast to New England is the state of Florida. You may say theyre not much alike, yet from a natural gas and power generation perspective, they are. Both of them are heavily dependent upon gas red generation, both are served by a limited number of interstate pipelines, both of them are literally at the end of the pipeline and neither of them has got indigenous gas supply or gas storage. However in Florida the ability to expand the pipelines to meet the needs of the generators and the needs of the market has not been anywhere near as challenging as in New England. Part of the reason I think is the market structure and the fact that if the Florida utilities can make their case to the public service commission that they need the pipe to fuel the generators, they get to recover it as part of their rates. The case in point there is that NextEra, which is the holding company that owns Florida Power and Light, recently did an RFP for pipeline projects in to the state. They got multiple proposals and ended up selecting a project called Sabal Trail, with Spectra as the sponsor. So its an interesting contrast where in one market you can get the pipeline capacity built and in another market youre very challenged in terms of getting someone to stand on the other side of the transaction to backstop the capacity.
What do you think is/are the key challenges holding back natural gas-red generation?
Number one, gas red generation is doing remarkably well so I am not sure there are major impediments holding it back. I think in some regions there is a concern about overdependence on natural gas. One question is developing a comfort in the market that supply is sufficiently abundant, the price will be reasonably stable and there is no reason to fear a dependence on gas for power generation. That ties back in to the infrastructure issues we talked about and really solving this riddle of what you need to do to ensure someone can pay for pipeline and storage capacity. The commercial and regulatory model for the natural gas industry is not one of central planning, of rolled in or subsidized costs. Its a model where pipeline gets built when shippers are willing to step up and pay the incremental cost of pipeline capacity. That has worked very well but its somewhat challenged here in this electric power context where theres an ability much of the time to ride on the surplus of the secondary market during those times when the distribution companies dont need their capacity. However, if reliability is important and of course it is, someones got to be willing to pay for the capacity that needs to be there at the peak time. The other pushback, and youre seeing it partly in New England, comes from the fact that the success of gas has been very disruptive for other fuels and generation technologies. Youre starting to see some pushback, particularly from the proponents of renewables. Going back ve or six years, when it was thought gas in the US would be expensive and domestic supply was diminishing, the assumption was that it would help to facilitate the transition to renewables. Now all of a sudden with gas being abundant and affordable, youre starting to get proponents of other fuels and technologies asking do we really want to be making this commitment to natural gas? Thats an undercurrent you see in New England and particularly in Massachusetts.


Richard Levitan - Levitan Associates Please give a brief summary of the study you are planning and conducting for the EIPC why is there a need for this and what will you assess?
In terms of the need for the study, the shale gas phenomenon has upended the conventional wisdom across North America in just a few short years. That means that the whole country is more dependent on natural gas for generation than ever before and the prospects for heightened dependence on natural gas seem inevitable. In part this is due to environmental regulations that make it difficult for the nations coal plants to stay in the resource mix as well as economic pressures on those coal plants to make a living. We refer to that as the dark spread, i.e. the difference between the value of the electricity and the marginal cost of making energy from coal based generation. That dark spread has historically been a big positive so that owners of coal resources can derive substantial prots from energy sales, but thats not really the case in this market due to the decline in the value of electricity, which is linked to the delivered cost of natural gas. So with commodity gas prices plunging throughout most of North America and with all this new pipeline storage infrastructure to accommodate very different production patterns its difficult for the coal plant generation owners to make a living and so were seeing and expecting to see increased retirements of those coal resources. Some of them will be replaced with renewable energy resources and of course this country is very deeply committed to demand resources and energy efficiency, but to power the factories and power the trains and get gas to where the generation plants are located and where new ones will likely be constructed, theres a need for new pipeline infrastructure, and thats happening. So the point of the study is to get a sharp x on where there will be new resources and the complexities between the gas and electricity systems, including the planning process between the pipelines and gas utilities to assess the interaction effects at the operating and planning level. Thats the rationale for the study and explains one of the primary target research objectives we have, of which there are four. The rst target is to develop the baseline assessment, that includes the description of the gas and the electric systems interfaces and how they impact each other and it includes the specic drivers of the pipelines and the LBC gas utility planning process. So were looking at operating and planning dynamics that affect both power security and the location of pipeline and storage infrastructure serving core gas utility loads and non-core power generation loads. The second target relates to the capability of the natural gas system to supply the individual and aggregate fuel requirements associated with gas red generation over the next 5-10 years. To do that requires an extensive amount of simulation modeling, both gas and electric, to identify the level and the special composition of the electric demands, the prole within the electric day itself and the sufficiency of the existing supply chain to meet what we colloquially refer to as the superior requirements of the LBCs versus the subordinate requirements of the electric generators. The gas utilities foot the bill for the supply chain. They obtain everything they need through contractual entitlements that are rm, but the market mechanism on the electric wholesale power side for the most part does not support long term contracts to pipeline and storage systems, so the electric generators have historically shipped their quantities on a non-rm basis which is to say that which is left over after the LBCs fulll 100% of their requirements. But now with all these changing market dynamics its not necessarily safe to assume that theres enough ex in the pipeline infrastructure to get both the gas and electric utility requirements met on a coincident basis, particularly on days like today when in the Midwest its 20 degrees below zero.


Target three is much more granular in nature. Were going to test how postulated disruptions in both power security or in natural gas infrastructure can adversely affect the electric system reliability. So both gas and electric side contingencies will be postulated and then well trace the location and duration of the disruption in terms of gas red generation, using hydraulic models as opposed to the other modeling system that is supporting the target two research. Target four, which will wrap up in 2015, will reect a review of the operating and the planning issues relating to the availability or non-availability of dual fuel capable units. So these are basically gas combined cycle plants or peakers or the old style steam turbine generators, that burn either kerosene, distillate oil or in the case of the old style steam turbine generators, residual fuel oil. There are many issues surrounding tankage, the use of liquids when operating and market conditions warrant, whether the generators actually maintain acceptable levels of working oil inventory and issues surrounding the replenishment of that stock when youre having a cold snap like the one were having at present in the mid central part of the country. These targets happen sequentially, with some overlap, and well be expecting to publish reports one by one starting in Q1 2014 through to the wrap up date of the EIPC study which is the end of Q2 2015. The study is on behalf of the Eastern Interconnection Planning Collaborative (EIPC). It is a study that is being undertaken pursuant to a cooperative agreement between the US Department of Energy (DOE) and the EIPC. The Eastern Interconnect covers half of the US, not including the Southeast and not including Florida. As far as Canada is concerned it only includes Ontario, a province that has already successfully wound down its dependence on all coal red generation. The study horizon is ten years so were looking at ve years and ten years to get these interaction effects between the gas and electric interfaces calibrated and researched properly to understand the sufficiency of the gas infrastructure to support the anticipated need for gas based power production. The nomenclature and the research objectives are the product of the PPAs: Midwest ISO, PJM, New York ISO, ISO New England, Tennessee Valley Authority (TVA) and ISO Ontario. Those are the PPAs who are essentially driving the study.
What was the chain of events that lead to the pipeline capacity crisis in New England and how likely is it to happen again?
It is not just one thing, its a panoply of market and geologic factors that culminate in economic price signals that has resulted in the acute deterioration in New Englands portfolio of pipeline resources and LNG storage facilities to power up the grid. For a long time New England was at the proverbial end of the supply chain. The large pipelines that move Marcellus gas from west to east are near fully utilized at present. There was a time when those pipelines were getting gas from the north, south to New England and there was a time when 40% of New Englands natural gas emanated from Western Canada. Twelve or thirteen years ago there was a great expectation that gas from Nova Scotia, from Sable Island, would not only meet the demands of Maritimes in Nova Scotia and New Brunswick but also create a lot of natural gas owing north to south, in to New England and for many years the region was dependent and is still dependent on LNG imports from Africa, Trinidad and to an extent Qatar. The chain of events that has caused the crisis relates to a decline in the use of that portfolio. We no longer get very much gas from Western Canada because its just too expensive to ship and there isnt enough natural gas in western Canada


to take care of the demands in the western part of the US and the demands in Western Canada, all the Tar Sands production and other unconventional gas production. The Sable Island gas supply has declined greatly. Theres substitution of natural gas from Deep Panuke supply also off the coast of Nova Scotia but its been slow getting that production in to the market, most of it is absorbed in the Maritimes and theres no reasonable expectation that the commodity balance will revitalize north to south ows in to New England. Which leaves us with LNG. There are two import terminals: ones at Repsol in New Brunswick and the other is Suez, Distrigas outside Boston. The destination exible cargos go to the premium markets, such as the UK, Zedbrugge and Asia, for obvious reason. Willingness to pay is far greater than the typical average pricing point here in New England. Yes there are cargos coming in but instead of two or three world class vessels coming in to Boston harbor weekly, which is what it was years ago, now it may be a shipment every week, or less. The pipeline system is congured with a lot of gas that really should be regasied in to the heart of the market but without that liquidity associated with the routine regas of import cargos from the Everett Distrigas facility, the region is more dependent on the west to east ows on Tennessee Algonquin, and all the action is out of the Marcellus production region in Western Pennsylvania and Ohio. Thats where everyone wants to get the gas because its so cheap in relation to Canadian gas or gas from the gulf coast. Theres more to that story, the chain of events doesnt stop with the geology of production and the accelerated decline or the high cost of lifting gas from Deep Panuke or Sable Island. The chain of events also reects market signals in the electric sector. We dont presently have a wholesale market design paradigm that induces the generators to foot the bill for rm transportation, so thats also a big part of the chain of events. It didnt just happen overnight, its been going on since the formation of the wholesale market in the late 1990s. Were sure to see run-ups in gas prices this winter, for the reasons I just mentioned. Its very likely when were looking at price effects. Price effects being basis blowouts in relation to what were seeing elsewhere in the continental US or in the neighborhood down in New York where there has been a massive build that just went commercial in November of 2013. We are seeing major new pipeline facilities crisscrossing the New York ISO, not so in New England. As far as crises are concerned the operational impacts are obvious and the ISO in New England has done a terric job anticipating certain constraints and is doing a variety of things proactive in nature to ensure or to facilitate the strategic location of sufficient liquids so that there are dependable operating hedges in place.
What steps can ISOs take to avoid issues like this in the future?
ISO is working feverishly with creative retooling proposals to its wholesale market design to pay generators for performance. If they call in sick because its chilly outside and the pipelines are running full and they cant get the gas, there may be more rst order economic impacts that could, depending on how this is implemented, be punitive. So there is a very active stakeholder debate with the ISO and with New England power pool to implement structural changes to the forward capacity market and one of the big steps that ISO can take to avoid issues like this in the future is to get the FERC approval for the deep structural change to the wholesale market we have. I think FERC is probably sympathetic to New Englands plight but that doesnt mean theyll turn a blind eye to the often-valid objections set forth by protesters and stakeholders, who have legitimate grievances about any change. So making any change can be very difficult and protracted to implement. Im sure that there are other steps designed to mitigate disruption during a transitional period but at the end of the day what the region needs is more pipe in the ground and there are proposals on the drawing board to do just that. However, whether it will be sufficient to meet the growth of the LBCs and the requirements of the generators is not known. Probably well have much more information in six months, though whether I have that information in time for the conference is another matter.


Can generators with gas-red facilities do anything to avoid this situation happening what could they do?
Sign up for rm transportation entitlements, cut deals with marketers or gas utilities that provide them with a rm arrangement regardless of temperature, that would be a way to avoid the curtailment effects that lead to the operating challenges at the bulk power level. New England derives more than 50% of its total energy supply from natural gas and the percentage is increasing with the retirement of coal generation in the region, so something has to give here. There is not to the best of my knowledge any philanthropy in the power business so you cant expect generators to make irrational economic decisions. They are constantly combing through the menu of options to nd the highest and best use of the physical assets available to meet the requirements in the day ahead in the real time market and right now the market signals dont promote the use of rm transportation on a long-term basis.
Aside from pipeline capacity constraints, what do you think is the biggest challenge for gas-red generation?
With downward pressure on energy margins and in many parts of the Eastern Interconnect a signicant megawatt overhang, it means that the intrinsic value of capacity is far less than what incumbent generators need in order to pay all of their bills. Their bills include 100% of their fuel costs, their non-fuel variable own end costs and their xed own end costs. There probably is enough money through the sale of capacity, energy and ancillary services to cover that entire but in many parts of the Eastern Interconnect there isnt enough money coming in to cover the return of capital and the return on capital. That frustrates lenders and equity investors so you cant expect incumbent generators to add additional capacity if theyre not reasonable condent that they can have the assurance of covering all of their out of pocket cash costs plus their equity investment and the requirements of the debt lenders as well. So there is tension as a result of the market design, tension that makes it difficult to rationalize new entry in this market economy that we have because the value of capacity is not sufficient to meet the capital and transmission standard - that is denitely a big challenge for gas red generators. The existing generators arent going to shut down unless they cannot recoup their cash cost, the sunk cost return of capital. Return on capital is of limited relevance and if it is relevant its because there are price signals that need to be carefully reviewed in making commitments for new generation. Theres a lag between retirements and the price effect in the capacity markets. With retirements we should see an appreciation of capacity value and that ought to stimulate new investment, but capacity prices have been volatile and therefore many generators are looking for contractual assurances from counterparties in order to make new investment and that is very difficult to put in place in the markets of relevance across the Eastern Interconnect. There are pockets of opportunity but it is difficult to implement.


Rick Smead - RBN Energy How long-term is natural gas as a solution for power generation in terms of US supply and renewables targets?
Weve got well over 100 years worth of accessible supply in the US even at elevated levels of use and including collective exports. Basically its indenite and when you consider the cycle of technology evolution, I think we can expect gas to be around for a very long time as a useful generation source. Over time I would expect to see two things happen. Firstly I expect that resource base to grow, because the size of the resource base is really a function of the extraction technology itself and that keeps improving. Secondly I would expect to see it evolving in to much more of a role as complimentary with renewables. At rst its a way of getting in and achieving the environmental benets early, and then tting together with them. Gas is a very good generation source in terms of being versatile and right where you need it physically. Right now it operates as competition for renewables because its cheaper but longer term I really expect it to be much more complimentary, as you get things like large-scale wind. One of the evolutions were seeing in the US is that up to a point you can install a lot of wind, as weve done in Texas, and rely upon the existing eet of gas generation to simply cycle differently to ll in the gaps when the winds not blowing. However you get to some point when theres not enough of that and you really have to build new, dedicated gas red generation to go with the new wind installations as an integrated installation. Then youve got the natural gas power generation already in place to ll in the gaps rather than just relying on the existing eet. Were going to see more and more of that. Its also noteworthy that in the last 20 to 25 years gas and wind have completely dominated new capacity additions in the US. Gas is 71% and wind is 14% so between them theyre 85% of total capacity additions, so theyve got to learn to be friends.
Is competition from other gas applications, such as growth of NGV or the petrochemical industry reason for generators to worry about short supply?
No it should not be generally. It could be locally, for example a very large petrochemical facility on the gulf coast in the same region as a large gas red power generation plant could strain the physical system of delivery until more pipe gets built. However in terms of the supply itself, all of the plausible scenarios of growth in all of these uses, including substantial growth in gas red generation, fall within an easy range of what the industry can add to the EIA estimations of supply. Rather than trying to do new stand-alone forecasts, we look at EIA forecasts of demand and supply, which results at least through the mid 20s and 30s with very stable, reasonable prices. From the governments estimates of a certain supply and demand trajectory we then ask how much demand could we reasonably expect to add to the EIAs pretty conservative estimates if all these things came true. Then the question is the ability of the industry to respond to that with additional supply without really causing much upward pressure on prices. I think around 2025 is when all the LNG projects are supposed to be fully cooking and when a lot of the petrochemical facilities will be in place, so 2025 is about the middle of the life of the large capital investments that are being made now. By then, the additional demand from all sources: NGVs, petrochemical, exports and power generation would add somewhere around 15 - 16 billion cubic feet a day to the EIAs estimates. Just looking at business as usual from the success in growing gas deliverability because of shale development, if nothing changes other than the current trajectory of development, it appears the production level will be about 19 billion cubic feet a day above EIAs estimates by


2025. So in other words without changing anything there appears to be more additional supply out there than additional demand that will be added. This means that no users such as power generation need to be worried about the reliability or price of supply if all thats true - and it looks pretty comfortable quite honestly.
How is LNG Export likely to affect the supply and pricing of natural gas for the future and what is the likelihood of LNG Export taking off?
In terms of the impact its really got to be part of the same question, its part of the overall demand for gas. The key is to come up with a reasonable estimate of how much there will really be. Lets assume were successful and the DOE gets out of the way and just lets everybody build what they want to build, how much LNG could really happen on the upside? A very interesting data point is that the current applications for DOE add up to 30 billion cubic feet a day. Somewhere around 15 billion cubic feet a day is all we expect to be added from all sources, so in other words 30 is a very big number. So weve got applications in front of the DOE that would supply 160m metric tons a year. Wood Mackenzie, ExxonMobil, BG and pretty much every other analyst out there all say that the entire need for LNG in the world by 2025, for plants that are already under construction, is 160m metric tons a year. The assumption that the US would get a 100% market share of all growth in LNG in the world, we think seems unduly optimistic. Particularly when you consider production from East Africa, Indonesia, Australia, Israel, British Columbia and then if they decide to the Qataris. There are just enormous and much more competitive supplies out there. Ultimately US LNG is very popular because of our pricing structure and people wanting to plug in to our supply abundance, so weve made the assumption (and it is just an assumption at this point) that the US will achieve more than a pro rata share of the new world market. That would still come out to only getting about 25% of the new world market which would equate to 8 billion cubic feet a day of US exports. The impact of 8 billion cubic feet a day on our supply and demand balance is what was built in to the overall balance that I discussed in the earlier question. So in essence we would achieve a comfortable supply and demand balance without prices going up signicantly, with natural gas still available for our generation both physically and economically.
Do you think gas will come under the same pressure from environmental regulations as are currently being enacted on coal-red generation why do you think this?
Yes it will. The chairman of the Massachusetts department of public utilities likes to say, Gas has half as much carbon as coal, but gas has half as much carbon as coal. So it really depends on where you establish your targets and how rapidly they come in but at some point theres no question that gas red generation will have to reach some degree of carbon compliance. Right now the new resources performance targets that the EPA has put out for power plants in the US are easily met by gas red combined cycle plants. Theyre much cleaner than what is required now however if we really aggressively got out there and tried to meet the kinds of long term goals the president previously established then theres some point at which carbon capture and sequestration would be necessary for gas red generation to operate at full capacity, or else it would have to be turned down so that you couldnt operate it as much. The downside with carbon capture and sequestration with gas red generation is that ironically the gas red generation isnt dirty enough, so it basically doesnt produce enough CO2 to make it worthwhile to collect it. The capital cost is much higher per unit than it is for coal. However, thats just a matter of technological evolution and theyll get there. Another noteworthy point is


actually a combined cycle gas plant really only produces about one third as much CO2 as a supercritical coal plant. The gas itself has about half as much CO2 but the plant is more efficient, it doesnt use as much so the end result is it produces about one third as much CO2 per MWh. So one of the big advantages is even if you ultimately do have carbon capture and sequestration you only have about one third as much CO2 to deal with. This helps in terms of where you store it or what youre going to do with it because thats not going to be easy. Looking at last years results when abnormally low gas prices caused gas to run a lot, just for a while in 2012 we suddenly got back to something like 1993 CO2 levels. When they measure this year it will all come back because prices shifted back around. But to me that shows we can use natural gas power generation as a tool to get far ahead of the curve early, recognizing that we may still have to do something else later. As opposed to doing nothing this is a very good way to go. The other environmental challenge for gas is opposition to hydraulic fracturing. Thats got to be fully resolved long term so that theres not the degree of public protest and sensitivity that there has been in some areas in the past. Thats up to the industry to perform and sell itself better. Its a technological issue but its also a pretty serious PR issues.
What do you think is/are they key challenges holding back gas-red generation?
Natural gas has been by far the dominant type of generation that has been installed since 1990 and so in essence gas red generation hasnt had any trouble capturing the market. However, once its installed in the market the use of economic dispatch for what really runs becomes a continuing challenge for gas. The reason is, if a gas plant only costs half or a third as much as a coal plant would have, then you build the gas plant. But then with economic dispatch the selection of which will run is going to be made based on the variable costs, which is the fuel and the fuel is more expensive than coal. So in most markets and especially in western markets, coal always runs rst and so the investors in a new gas red combined cycle plant can very well be disappointed, expecting it to run 60% of the time and it only runs 30% of the time because its just used to cycle in the higher loads. What that does is undermines the economics and undermines their willingness to build the next plant. So the number one impediment to the growth of gas red generation is simply nding ways to cause it to run more, to run at higher efficiency levels and higher capacity. One of the other issues that is holding gas back as well that has been high prole lately is the so called gas electric harmonization or the interaction of the business models between the gas industry and the electric industry. Theres a lot of reluctance on the part of many power managers to rely on gas because its the only just in time fuel. Every other fossil fuel, whether coal or oil or anything like that, you can have on site. You can look out your window and see a pile of coal, but with gas you cant do that so it either shows up in the pipeline right when you need it or it doesnt, and if it doesnt then youre plant doesnt run. So that makes utility engineers very nervous. Also pipelines need to run at predictable, stable levels and the way the gas red generator will jump around with the load on the system is really inconsistent with the way the pipeline needs to operate. It can pull pressure the wrong way etc. So theres work going on in the regulatory arena to try to synchronize these business models. The time that your gas will start owing and the time that your power has to start running have to be much more synchronized. Also services need to be in place to allow rapid ramping up and down of the pipeline to an extent that isnt really possible on pipelines now. So with all that discussion going on and trying to make gas delivery service completely compatible with the way the generator needs to operate, one of the difficulties is the fact that so many gas red generators are the last ones dispatched. They are sitting there waiting and suddenly get called on at short


notice, so they try to draw fuel from the pipeline. If you can get to a level where youre running much more predictably and base loading a lot more gas red generation, many of the gas electric harmonization issues out there start to become very minor issues and not nearly as big of a deal as they were when you were jumping around all over the place in terms of load. So the two impediments are the economics of run time and the interaction and compatibility of pipeline business models and gas red generation business models.
What about the benets of gas-red generation?

One of the advantages of gas red generation that I think has been very much overlooked is when we look at it in comparison with wind, nuclear or hydro, the ability to locate a gas red generator wherever you want it. As long as you have pipeline access you can put it close to load, you can put it in places that do not put the same burden on the transition system. Our electric transition systems under enormous pressure and theres lots of discussion about the need to build new transmission, but no real ability to do it. So the ability to replace transmission with generation thats in the right location I think is an enormous asset. If you compare it with a big nuke that certainly isnt going to go close to the load, a dam is going to go where the water is not where the load is and wind is going to go where the wind is and not where the people are. Being able to build a plant in the middle of a city and have it still be clean enough that its not a big deal and is not very physically obtrusive, is a tremendous asset.


Gordon Pickering - Navigant In terms of US natural gas reserves, how long-term is natural gas as a solution for power generation?
The question is framed relatively narrowly in just looking at power generation. That gives a clue for the misconception perhaps of some folks in the marketplace as to the size of the abundance of the resource base of natural gas in North America. In 2008 when the conventional wisdom was that we were running out of natural gas, Navigant did a study for American Clean Skies that indicated that because of shale gas and technological breakthroughs of hydraulic fracturing and horizontal drilling there is more gas in the country than previously understood. So much that were in a situation, as it's turned out today, that there is actually a surplus of natural gas in the marketplace. So when somebody asks the question in terms of US gas reserves how long is there gas for power generation, theres no concern in answering that question that its literally hundreds of years. This is because we look at the total market, of which power generation is an important part but only part. On that basis we have come up with an assessment on a mean basis of enough gas for around 100 years of gas supply taking all demand in the country, not just power generation, in to account. So there is a real abundance of natural gas for many, many decades if not centuries.
Do you think gas will come under the same pressure from environmental regulations as are currently being enacted on coal-red generation why do you think this?
Not at all. I think what were really talking about is apples and oranges, especially in terms of the carbon content of the two fossil fuels: natural gas and coal red generation. Natural gas after all is the cleanest fossil fuel that we have. It has roughly half the carbon emissions of coal and it has other qualities that make it a superior fossil fuel compared to coal. That being said there is still a right way and a wrong way for the natural gas industry to operate and to manage its production process, its distribution systems and its pipeline network etc. on to the end use market. Under the regulations that were moving to and in conformance with the best available practices, natural gas can be produced with minimal environmental impact.
Should power generators be worried about competition from other gas applications, such as growth of NGV or the petrochemical industry?
No, the largest sector for the natural gas industry is the power generation sector and it likely will continue to be the largest sector. The emergence of potential for natural gas supply in the transportation market with NGV vehicles, industrial applications, the petrochemical industry or other uses will grow but in general there is more than enough gas supply to serve all the applications under most if not all circumstances in the long term - such is the abundance of natural gas in North America. When we talk about abundance of natural gas we must always keep in mind its through gas shale. Thats the reason there is this abundance and gas shale has basically reformed the market as a result of a technological breakthrough through hydraulic fracturing and horizontal drilling.


Would LNG export development pose a threat to gas power generation in terms of supply or pricing?
No very clearly not and Navigant has been closer to the LNG export industry than any other rm in the industry. Weve supported eight LNG export projects in their applications to the Department of Energy and weve looked very closely at the question of the impact of LNG exports from North America and have found and publicly reported that at the levels of exports we believe are likely in North America, it will have a very small impact on pricing. It will actually serve a useful purpose as the coal to natural gas conversion of the power generation industry peaks over the next few years. Most of the conversion that is taking place now will have peaked in about 2015, and afterwards, as natural gas exports through the LNG industry come on, that will replace what has been virtually the only growth market for the natural gas industry.
What do you think is/are they key challenges holding back gas-red generation?
I dont know if theres much holding back because at this point in time the industry is pretty busy in replacing coal-red generation with gas red generation. I dont want to overstate this but the only thing is that in certain cases there are local and regional infrastructure challenges in terms of pipeline capacity. In most cases though this kind of pipeline and infrastructure build out is what the industry has done historically. Were not talking about a massive build-up of long, large diameter pipelines. In most cases were talking about regional pipelines to get gas. I dont view it as a challenge - its a consideration for the industry but its something that the industry has done before.


Final Remarks
Supply, regulatory and technological factors all point towards the continued growth of gas-red generation in the US. In terms of the supply of gas, all of the contributors to this white paper are condent that there are sufficient reserves to satisfy all sources of demand in the US, at competitive prices, for decades if not centuries to come. Policymakers actions have catalyzed the switch to natural gas as a substitute for coal. So while the balance of generation between coal and gas is sensitive to short-term price uctuations, there are only a handful of new coal plants planned compared to multiple gas-red facilities. This serves to underline the longer-term trend. Regulatory requirements make gas the more viable alternative that can become a greater part of the future energy mix. Nevertheless, industry experts are realistic about the potential of natural gas, hinting that its environmental benets will not entirely satisfy eventual targets for greenhouse gas reductions. A resource mix between natural gas and renewables is emerging, and getting this right will pose a fresh challenge for the industry. Widespread acceptance of gas-red generations upward trajectory has stimulated industry actors to seek ways to confront the issues it faces. The environmental concerns surrounding upstream production of natural gas are being investigated, and industry recognizes the need to communicate with the public to allay concerns. In terms of generation, greatest focus is on the interaction between the natural gas supply and power generation industries. If a solution can be reached swiftly, it will save the industry from much avoidable criticism. Nevertheless, in the wider scheme, the challenges natural gas-red generation has faced are minimal compared to the positive impact it has made. Gas-red power has helped to signicantly reduce US carbon emissions for the rst time. CO2 emissions from power plants fell approximately 10% in 2012. The natural gas-red industry has and will continue to help create jobs and boost the economy. Taking both of these aspects in to consideration, gas-red generation has been a remarkable success, with signicant room left for growth.
If you are incorporating natural gas into your generation strategy in 2014, get ahead by attending the 2014 Natural Gas Power Generation Conference & Exhibition. The two-day forum will take place May 19-20, 2014 in Chicago Illinois. Find out more at www.gaspowerevent.com This two-day event will connect the key stakeholders in one place to discuss the key issues and create relationships. It will give generation professionals a chance to hear about new services and products and hear strategy tips from the market leaders. Youll be able to meet, network and share information with over 250 senior decision makers from across the entire gas-red generation value chain. With gas emerging as the leading fuel choice for generation and many plants now under construction, can you afford not to attend? Click HERE to nd out more

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Gas-Fired Power Generation USA: Market Report

Gas-Fired Power Generation USA: Market Report

NATURAL GAS POWER GENERATION

Gas-Fired Power Generation USA: Market Report

NATURAL GAS POWER GENERATION

Gas-Fired Power Generation USA: Market Report

NATURAL GAS POWER GENERATION

Gas-Fired Power Generation USA: Market Report

NATURAL GAS POWER GENERATION

Gas-Fired Power Generation USA: Market Report

NATURAL GAS POWER GENERATION

Gas-Fired Power Generation USA: Market Report

NATURAL GAS POWER GENERATION

Gas-Fired Power Generation USA: Market Report

NATURAL GAS POWER GENERATION

Gas-Fired Power Generation USA: Market Report

NATURAL GAS POWER GENERATION

Gas-Fired Power Generation USA: Market Report

NATURAL GAS POWER GENERATION

Gas-Fired Power Generation USA: Market Report

NATURAL GAS POWER GENERATION

Gas-Fired Power Generation USA: Market Report

NATURAL GAS POWER GENERATION

Gas-Fired Power Generation USA: Market Report

NATURAL GAS POWER GENERATION

Gas-Fired Power Generation USA: Market Report

NATURAL GAS POWER GENERATION

Gas-Fired Power Generation USA: Market Report

What about the benets of gas-red generation?

NATURAL GAS POWER GENERATION

Gas-Fired Power Generation USA: Market Report

NATURAL GAS POWER GENERATION

Gas-Fired Power Generation USA: Market Report

NATURAL GAS POWER GENERATION

Gas-Fired Power Generation USA: Market Report

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