Old Gas, New Gas

Lest you doubt that natural gas is the fuel of choice across North American power markets, the Energy Information Administration (EIA) says that 237 GW of gas-fired power generation was built during the decade of 2000 to 2010 reflecting the end of the last boom stage of the power business cycle and the worst of the bust stage we are slowly pulling out of as reserve margins tighten.

That 237 GW is 81% of all the power generating capacity added despite the often frenetic pace of wind and solar projects over the last half of the decade. Two thirds of that additional gas-fired generation is flexible combined cycle plants designed to follow load up and down.  The rest is peaking capacity that sits idle much of the time.

The markets have spoken declaring natural gas fired generation the power technology of the decade.  The markets believe so much in the potential of natural gas generation that the largest category of power plant retirements over the decade is also old gas plants being replaced by new, better, more efficient combined cycle plants with higher efficiency ratings. More than 64% of total power plant retirements were natural gas plants with an average age of the retired units of 48 years.  These were the old dogs of the gas fleet replaced by the sleek, sexy muscle machines of the power generation future.

By the end of 2010 natural gas fired generation made up 39% of the total US power generation fleet.  That market share is expected to grow. In its Annual Energy Outlook 2012 Early Release, EIA says overall growth in fuel demand for power generation will average about 0.8% per year with sometimes significant regional variations.  This is near historic averages.  It assumes fairly slow continued economic recovery essentially projecting current conditions forward.   It is a safe, relatively non-controversial assumption especially in an election year.  But it makes some significant risks including:

  • Potential forced retirements of a significant share of the coal power plant fleet because of new EPA regulations on emissions.
  • Low prolonged natural gas prices could stimulate increased industrial demand as the competitive costs of manufacturing closer to markets improve and the costs of transporting raw materials and finished goods around the world erodes margins.
  • The continued growth of renewable energy market share while still small relative to coal and natural gas requires backup generation to resolve its intermittency, the erosion of coal market share from forced retirements, the growth in new natural gas combined cycle generation to replace it is likely to result in another spike in natural fired generation expansion like the one we saw at the beginning of the 2000 to 2010 decade given the high failure rate of renewable energy projects as subsidies are reduced.

Put it all together and natural gas-fired power generation is likely to repeat its performance as the fuel of choice for the 2010-2020 decade.