Q&A: ScottMadden consultant on natural gas infrastructure

Jason Davis, a director at ScottMadden Consulting, spoke with GenerationHub recently about infrastructure issues that could undermine the growing use of natural gas for electric power. He has 11 years consulting experience. Prior to joining ScottMadden, Davis worked at AGL Resources in gas distribution, operations, LNG plant engineering, and gas supply.

The transcript has been editedfor length.

GenerationHub: Are power prices going to be high enough in the next few years to justify much new power infrastructure investment of any kind?

Davis: Based on current forecasts, it appears prices will not be high enough.  EIA’s latest forecast from the Annual Energy Outlook 2012 Early Release predicts end-use electricity prices will decrease over the next 10 years (9.8 cents per kWh in 2010 to 9.2 cents per kWh in 2020).  Power prices typically follow trends in fuel prices (increasingly natural gas in the future). While future natural gas demand in the power sector may increase prices over the next few years, it will take longer for electricity to reflect these trends due to the time required to incorporate these changes in supply contracts and rate cases. Expect the power industry to take a cautious approach.

GenerationHub: In your opinion, is there currently sufficient pipeline infrastructure to connect new sources of shale gas with gas-fired power plants currently on the drawing board?

Davis: While the industry has been developing pipeline capacity from shale production areas, we do not believe it is sufficient to support planned new gas-fired generation. According to NERC projections, up to 93 GW of gas-fired generating capacity (45 GW planned and 48 GW conceptual) may be added over the next 10 years.  To meet the demand of the planned capacity, an additional 24,000 miles of pipeline may be required.

A recent study of available pipeline capacity in the Midwest ISO region produced a similar conclusion.  Also, the New York ISO, in its annual outlook of the state’s electricity supply and demand, noted that the increasing reliance on natural gas for power generation and the lack of firm pipeline capacity for gas-fired plants may create reliability issues in the future. Another key consideration is the challenge in meeting load requirements of a gas-fired generation plant, which are unique when compared to other pipeline customers (e.g., LDCs). 

A new gas-fired generation plant can use significantly more gas and often has higher pressure requirements.  Usage may vary significantly day-to-day and even hour-to-hour due to changes in weather or unplanned outages. The large, highly-variable loads can quickly exhaust the line pack that a pipeline often utilizes to serve its customers.

Lastly, flexible storage is an important component of the natural gas power infrastructure. Storage helps meet the large swings in usage.

GenerationHub: Do you foresee any big problems in the new few years in getting the infrastructure to match up with the new power plant development?

Davis: Yes. Transmission line lead times are often 10-12 years while a gas combined cycle unit can be built in three. The current climate: low economic growth, low load growth (EIA is projecting less than 1%) and compressed spark spread, may lead to a “wait and see” approach for new generation build. 

This will likely be followed by a rush to build generation and catch up, once load grows sufficiently. Transmission cannot be sited and built that rapidly. Moreover, transmission plans will need to be revised as additional generation is added to the queue or retired. 

Developments in the gas industry may present additional challenges. First, pipeline safety has become a top priority, and industry stakeholders are developing actions that will enhance and enforce safety standards. These actions increase the time required for siting, planning, and approval. Second, a significant percentage of pipelines in the U.S. is aging and will require replacement in the near future.

Also, the power generation and natural gas industries will need to consider the potential impacts of capacity requirements on delivery service.  Traditionally, expansion of pipeline infrastructure has been based on firm contracts with its customers, like LDCs. In contrast, power customers (e.g., peaking plants) have often purchased interruptible gas delivery. In cases where natural gas is replacing coal-fired baseload generation, interruptible service will be insufficient.  Close coordination between the power generation and natural gas industries will be needed.

GenerationHub: Will the gas lines get built quickly enough to serve the gas plants that are expected to come online?

Davis: For projects with known in-service dates, the completion of gas generation plants appears to be generally aligned with the completion of pipeline capacity projects (i.e., by or before 2018).  However, a significant amount of generation and pipeline projects currently have no published in-service date. 

Another unknown is the timing of unannounced retirements of coal generation. These uncertainties make transmission planning more challenging, given the long lead times required.

GenerationHub: In the next 10 years or so, do you see many natural gas-fueled power plants being built on sites of current or retired coal plants – in order to use existing electric transmission?

Davis: Absent any residual environmental liabilities, repowering coal with natural gas on-site is probably easier than constructing new plants.  Some utilities are planning or considering repowering of their older coal-fired facilities and the number of utilities weighing this option may increase, assuming environmental regulations continue their present course. 

However, efficiency improvements and modest economic growth, which have weakened demand, may impact the number of facilities that are repowered. Also, repowering requires access to gas. As mentioned before, a modern, large combined cycle plant has a large, highly-variable gas pipeline load with requirements for high pressure. This can create issues during winter peak when both heating load and electric generation load are high.

GenerationHub:  As for the existing gas plants that might be under-used, are they located in the right places for electric transmission lines?

Davis: During the merchant generation boom, the locus of gas pipelines and electric transmission was a criterion used in siting new combined cycles.  In the U.S., combined cycle gas plants with below-average capacity factors are located adjacent to electric transmission lines in most cases. 

So, some of these plants should be able to absorb the additional loads that will result from coal-to-gas switching. 

GenerationHub: What about the trend toward new rules governing fracking and other advanced gas production methods? Will that blunt natural gas growth in the power market?

Davis: The proposed fracking rules should not significantly impact future displacements of coal-fired units by natural gas. Potential outcomes of the new rules include more time required for drillers to obtain well permits, additional effort to comply with the rules (e.g., preparing disclosure statements, developing plans for flowback water), and ability for states and municipalities to levy penalties and fees. These outcomes could lead to increases in gas prices over time but should not be enough to impact the shift to natural gas.


About Wayne Barber 4201 Articles
Wayne Barber, Chief Analyst for the GenerationHub, has been covering power generation, energy and natural resources issues at national publications for more than 20 years. Prior to joining PennWell he was editor of Generation Markets Week at SNL Financial for nine years. He has also worked as a business journalist at both McGraw-Hill and Financial Times Energy. Wayne also worked as a newspaper reporter for several years. During his career has visited nuclear reactors and coal mines as well as coal and natural gas power plants. Wayne can be reached at wayneb@pennwell.com.