ICF sees growing reliance on natural gas units

ICF International (NASDAQ:ICFI) expects an increasing number of new natural gas power units to meet reserve margin needs due to nearly 60 GW of coal retirements projected over the next four years.

That’s one of the highlights of ICF’s just-released energy forecast for the fourth quarter of 2013. Growth in power generation is being met largely by gas and, to some extent, renewables, ICF said.

Natural gas will be meeting the growth needs in power generation, said ICF Principal Chris MacCracken.

While the 60 GW of coal capacity retirements is a large number, these plants represent “the smaller, older units that haven’t been running that much anyway,” MacCracken said.

The march toward gas did slow some during the first half of 2013, ICF said.

In the first half of 2013, gas-fired generation decreased its market share from 30% to 26% of the total generation. Coal-fired generation’s share increased 10% and made up 39% of the total generation compared to 35% in first half of 2012.

The impact of coal units retiring or becoming more expensive to operate will drive power prices upward, especially in the Midwest and Southeast, where most coal capacity is located, ICF also said.

The news isn’t all bad for coal generation. The firm sees increasing upward pressure on natural gas prices by the end of the decade. Likewise, ICF projects coal power to decline by less than 10% from 2014 to 2037.

The renewable market activity has been influenced by the recent extension of the production tax credit (PTC), which has supported wind capacity development to some extent in the near-term. However, the long-term outlook on national wind development remains unaffected. State renewable energy mandates will remain crucial to renewable development through the next decade.

In the gas market, producers have maintained output despite a decline in rig counts due to high yields from the shale plays. Also, the lack of gas processing capacity in the Marcellus natural gas production basin, located in the Northeast U.S., has resulted in higher volumes of marketed gas because of “ethane rejection.” This strong supply environment, combined with relatively weak demand due to mild summer weather, has resulted in gas prices of $3.50/MMBtu or below throughout most of the United States.

ICF projects that total U.S. and Canada shale gas production will increase from about 29 Bcfd in 2012 to 74 Bcfd by 2030.

“While ICF expects gas prices to remain soft for the next 18 to 24 months, we expect prices to firm rapidly as demands from new petrochemical plants, LNG export terminals, and pipeline exports to Mexico start ramping up in 2015,” the consulting firm said.

These new demands, combined with increases in demand resulting from expected coal plant retirements, will place significant upward pressure on gas prices and increase the potential for price volatility through the end of the decade.

Regulatory, legal issues abound for generators

The ICF analysis also said a variety of legal and regulatory issues await the nation’s coal-fired power generators. They include everything from the Supreme Court agreeing to review a lower-court decision on the Cross-state Air Pollution Rule (CSAPR) to the Obama administration’s recent issuance of a proposal to regulate greenhouse emissions from new power plants.

The overlap of various environmental standards, and their timing, could require power plant owners to re-evaluate their plants year-to-year. “A future with CO2 regulation, for example, may bias an owner toward the retirement of a coal unit in the next 3 years rather than a new control investment,” ICF said.

As for coal production, U.S. thermal coal prices hovered at low levels in the second quarter of 2013 after a mild recovery from the summer lows of 2012. Rising natural gas prices have favored increases in coal burn, but will not immediately lead to increases in coal prices.

As of Sept. 5, Central Appalachia NYMEX spot coal was $63.20/ton, 6% lower than the midsummer prices, ICF said.

Near-term, weather-driven demand has moderated coal consumption. International prices are down from the past three years, which makes U.S. coal less competitive and is reducing U.S. exports in 2013 compared with the record high exports in 2012. With gas prices expected to remain low for the next several years, and electric load growth at moderate levels in many areas, domestic coal demand will remain flat in the near- to mid-term with a gradual decline starting in 2025.

Bituminous coal stockpiles decreased by 11% in the second quarter to 83.5 million tons on year, but remain near the high end of a historically normal range.

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.