2014-01-26 15:41:08 - New Energy market report from Business Monitor International: "United States Power Report Q1 2014"
While we have long held the view that the glut of cheap gas in the US will drive the acceleration of gas-fired capacity expansion and determine the composition of the country's energy mix, we have also cautioned that an inevitable rise in gas prices would lead to fluctuations in coal-gas generation dynamics. With this in mind, it appears coal generation has rebounded in 2013 due to higher gas prices in the first half of the year. While we maintain that the biggest alterations to the US generation mix have already taken place and this short-term recovery in coal will dissipate as coal-fired capacity comes offline to comply with emission standards, we remain cognisant of the fact that gas prices are
likely to rise as LNG export capacity comes online in 2016. This could mean that other forms of power generation become more competitive as gas prices rise over a longer timeframe - a point that crystallises when looking at the shortterm resurgence in coal.
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Although we have emphasised that the biggest alteration to the US' energy mix has likely already taken place, with natural gas-fired electricity generation having surged 21% in 2012, we anticipate that between 2014 and the end of our forecast period in 2022, natural gas-fired generation will continue to gain traction as the fastest-growing traditional source of electricity generation. Indeed, we have already indicated that coal's role as the preeminent source of electricity generation in the US has eased gradually, and we anticipate that its share will dwindle further as the shift from gas to coal continues.
Yet, crucially, our view on the utilisation of gas in US electricity generation continues to be tempered by the realisation that such dynamics are contingent on gas prices remaining low. Indeed, we emphasise that we have seen rising gas prices - due to falling gas production rates in early 2013 - trigger a resurgence in coalfired electricity generation in 2013.
As such, we emphasise that while we expect utilities to continue to take advantage of cheap gas prices to generate electricity over the long-term, we remain cognisant of fluctuating gas prices. With BMI's Oil & Gas analysts anticipating that gas prices will rise to US$7.1mn BTU by 2019/2020, due to LNG export capacity coming onstream in 2016 and an uptick in demand for gas from the petrochemicals sector, tightness in supply (and rising prices) could mean some sources of generation which are currently uncompetitive (such as coal and nuclear) will become more competitive. Much will also depend on the stringency of US Environmental Protection Agency (EPA) emissions standards governing existing power plants, which are due to be released in 2014.
Developments in the US power market this quarter include:
* Although the longer-term trends with regards to annual average growth in gas-fired generation (1.52% between 2014 and 2022) remain in place, the rebound in coal-gas generation over 2013 appears to have been significant, based on data releases for the first nine months of 2013. We now forecast gas-fired electricity generation will have fallen by around 7.0% year-on-year (y-o-y) by end-2013, while coal-fired generation will have grown by 5.75% y-o-y, as utilities switched to burning coal as gas prices climbed due to lower gas production in first half of the year. Our view that growth in gas-fired generation will be governed by a series of competing factors (not least gas prices), crystallises when considering this
* Nevertheless, with gas prices now having fallen back again, we expect this rebound to dissipate - as coalfired capacity is taken offline through 2016 and a number of utilities forge ahead with plans to build new gas-fired capacity.
* To this end, work on Dominion Virginia Power's 1,329MW natural gas-fired Warren County Power Station is 50% complete, with the facility on track to be operational by Q414. Meanwhile, in September 2013, GE Energy Financial Services, Competitive Power Ventures and ArcLight Capital Partners announced the closure of financing for the 700MW Woodbridge natural gas-fired power plant in New Jersey.
* Following President Obama's long-awaited June 2013 speech on climate change at Georgetown University, which outlined plans to establish policies to limit coal use, boost energy efficiency and spur investment in green energy, the Environmental Protection Agency (EPA) announced Carbon Pollution Standards for new power plants in September 2013. Crucially, the EPA also said it aimed to establish standards to reduce emissions from existing facilities by June 2014. The announcement triggered more criticism of President Obama, whom the coal industry has accused of launching a 'war on coal'.
* In November 2013, the Tennessee Valley Authority (TVA) said its board had approved a plan to close eight coal-fired power plants with a combined 3,000MW of capacity across three sites in Kentucky and Alabama. Although TVA has not given a date for retirements, the closure of the units is in addition to TVA's agreement with the US Environmental Protection Agency to retire 18 of its 59 coal units by 2018. Notably, TVA said it would continue to operate Unit 3 at the Paradise plant and would build a gas-fired plant to replace units 1 and 2 at the site.
* Consol Energy's October 2013 decision to sell a third of its coal business to Murray Energy for more than US$3.5bn aligns with our long-held views on the shift to gas in power generation. Consol is one of the US' largest coal producers but will effectively transform itself from a coal company that has gas, to a gas company that has coal.
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