Natural Gas & Coal Square Off
By Lindsay Morris, Associate Editor
As natural gas prices have reached startling lows this year, gas has taken a sizeable amount of U.S. electric power generation from coal.
Many utilities being forced to retrofit or retire coal-fired facilities to comply with the Mercury and Air Toxics Standard and Cross State Air Pollution Rule are finding solutions in revamping their plants as partial gas-burning facilities. Additionally, natural gas facilities constructed in the early 2000s that have been operated as peakers in the past are now being called upon to run at significantly higher rates.
According to data from the Energy Information Administration (EIA), natural gas accounted for 28.7 percent of total generation during the first quarter of 2012, compared with 20.7 percent during the same quarter last year. In contrast, coal's portion of total generation declined from 44.6 percent to 36.0 percent over the same period. Even more drastic numbers can be seen when comparing the amount of gas generation in March 2012 to March of last year. According to the EIA, U.S. power plants increased natural gas use by 40 percent this March compared to a year earlier – from 503.9 billion cubic feet (Bcf) in March 2011 to 703.5 Bcf in March of this year.
With regulations targeting not only the traditional emissions such as sulfur dioxide and nitrogen oxide, but also new challenges like mercury and carbon capture, coal is not a cheap option for the time being. A number of new facilities that were formerly proposed as coal plants have switched to full natural gas or combined cycle over the last few years. One of the few remaining proposed coal plants, the Taylorville Energy Center, is likely to switch to gas.
Taylorville is a planned development of Christian County Generation, L.L.C., a joint venture between affiliates of Tenaska and MDL Holding Co. The plant was conceived to be a state-of-the-art coal facility – a mecca of clean coal technologies and one of the first coal plants to incorporate carbon capture and storage (CCS) technology. The facility would also burn coal in an innovative way by cooking it into methane, capturing the carbon dioxide (CO2) released in the process, then burning the methane in a conventional natural gas-style power plant. In May, however, the company released a revised "Power Block First" proposal for the center, which revealed that constructing the plant as a full gas and eliminating the coal aspect would result in a $437.7 million savings over the first 20 years of the project.
The revised proposal would substitute the initial stage of TEC with a 611 MW natural-gas fired combined-cycle plant that would be capable of accepting substitute natural gas (SNG) from a potential future coal gasification unit. If market conditions for coal were to improve, the second phase of the project would still incorporate coal gasification with CCS. It's expected that if the project were to move forward as originally planned, it would cost $3.5 billion, whereas a strictly gas center would cost about one-third the cost.
Construction at another coal plant has nearly reached completion, but at almost $1 billion over budget. Edwardsport, a "capture-ready" Duke Energy coal plant, is expected to begin commercial operation this year. The plant, in Edwardsport, Ind., will cook coal into a fuel gas and could be retrofitted to capture CO2 released in that conversion. The plant cost nearly $3 billion to build, about $1 billion over budget, and, if implemented, carbon capture would cost $380 million, not counting storage.
Natural Gas Futures
The continued development of natural gas shale resources and an exceptionally warm winter have contributed to an overabundance of natural gas. The average spot price for natural gas in April 2012 was less than $2 per mmBtu, and prices may remain relatively low for a while, according to many analysts. Royal Dutch Shell, however, says gas prices in the U.S. will double in the next three years due to the gas demand as coal is replaced for gas in electricity.
But a doubling of current natural gas prices would not necessarily keep power generators from using gas generation, said Barry Nicholls, vice president of power systems sales for Siemens Energy's North American division. "I don't think anybody is concerned about anything below $5 gas. Once it gets over $5, then some decisions start to change relative to the economics of coal versus gas."
Long-term, it's expected that it will take a while for gas prices to climb dramatically. "We're expecting $5 gas in a couple years," said Kevin Geraghty, vice president of power generation at NV Energy. "Ten years out, you're seeing $6 gas. Fifteen years out, you're seeing $8 gas again. All those things, coupled with carbon costs, make it very difficult to bet the bank on gas."
For the short-term, gas will likely stay far below $5, especially if the summer is as mild as the winter was. Ben Stravinsky, an analyst at Energy Ventures Analysis (EVA), said natural gas storage might reach capacity levels this summer. "We need to start consuming more of it, and the only place to go is the electric power sector."
In the Southeast region of the U.S., gas demand for power is forecasted to increase during the summer months of July through August, according to Bentek analysis. An increase from 8.1 Bcf/d in 2010 to 10.1 Bcf/d this year and 11.2 Bcf/d in 2015 – ultimately a 38.3 increase – is forecasted for the region.
Nicholls said Siemens expects gas demand to pick up nationwide this summer. "The price will go up a little to $2.50 to $3.00. Some are saying that if the summer is not very warm, prices could drop to $1.50."
Coal Vs. Gas
In comparison, the price of coal is remaining relatively stable and could increase due to the export market, Stravinsky said. "Because we have a weak U.S. dollar and there is global demand for coal, export markets are taking off. This past March, the U.S. had the largest amount of steam coal exported since 2000."
Based on data from the EIA assessment of the cost of coal-fired power, Bloomberg Government found that natural gas prices would need to increase to almost $10 per mmBtu for a power plant developer to be indifferent between building for coal or natural gas. (See Fig. 1)
"Essentially, a natural gas plant can comply with the EPA's proposed standard at a much lower cost, which begs the question of why investors would choose to build coal with CCS," said Rob Barnett in the Bloomberg Government study, "The Twilight of Coal-Fired Power?".
By the end of 2012, the U.S. power market will have experienced about double the amount of fuel switching to gas than what occurred last year, Stravinsky said. "Coal is no longer baseload."
Much of the increase in gas generation this year has not occurred at new facilities. When gas prices were low in the early 2000's, a rush to gas occurred, leading to an add-on of about 180 GW of gas generation. EVA estimates that coal-to-gas switching is currently taking place in every area of the country except the Mountain and West regions.
"Coal-to-gas fuel switching increased in 2011 and displaced an estimated 140 TWh of coal generation with natural gas (from 2007-2008 generation levels). This is the equivalent of roughly 71 million tons of coal or 2.8 billion ft3/day of gas," according to EVA.
While gas is certainly a growing part of U.S. power generation, Nicholls hesitates to label the current market condition as a "boom." Siemens considers the period from 1998 to 2002 to have been "the boom" of gas turbine purchases, he said. "In one year, we experienced a factor of 10 higher than what would be considered to be a good year."
However, when gas prices increased dramatically over the next few years, these new plants experienced extremely low utilization rates of between 40 to 50 percent for years. But now, for the first time in their history, these plants are running at historically high rates of about 70 to 80 percent this year due to the low gas environment, according to Platts.
EVA identifies the current market as a "mini-boom" of new gas generation, as over 50 GW is expected to come online from 2012 through 2015. Of the total 69.5 GW announced through 2018, 83 percent of capacity is combined-cycle technology; the remainder simple cycle (see Fig. 3).
While an immense resource of gas capacity already exists in the U.S., Nicholls said Siemens has seen some movement from the power industry for new turbine inquiries and orders. "The volume that's being ordered in the country has picked up and our forecast is that it will continue to grow year after year."
However, there is still hesitancy from the utility industry toward too much baseload gas, Geraghty said. "If gas really does get back up to $6 to $7, you're not going to see a lot of large, baseload coal go away. Even at $5, existing coal is still in play."
Additionally, power generators must consider potential carbon legislation for new coal facilities. The proposed standard would require all new coal plants to install CCS technology. According to EIA estimates, electricity generated from coal with CCS is nearly 50 percent more expensive than energy generated with conventional coal, and nearly twice as expensive as electricity generated with natural gas. (See Fig. 2)
