Generation Technology Decisions

Antonio Mexia, CEO, Energias de Portugal

US ANNUAL POWER DEMAND IS PROJECTED to increase by 260 TWh by 2015, according to the Energy Information Administration's Annual Energy Outlook 2008. The EIA forecasts 64 GW of new capacity will be installed to meet this demand. Building these new generation assets will require decisions on what fuels and technologies to employ. These are decisions that will impact the country for several decades. Given this urgency, those involved in the development, regulation and funding of new power assets must address several key strategic challenges. What generation technologies will be profitable going forward? Which can be built in time to supply this energy? What generation technologies allow us to meet this supply need while limiting greenhouse gas emissions and respecting growing public opinion against climate change? How can regulators attract new generating capacity to be built without exposing ratepayers to price risks from fossil fuels, CO₂, and uncertain capital costs?

Has the Last Conventional Coal Plant Been Built?

Pulverized coal generation, long the first option for new baseload generation, is increasingly seen as an obsolete technology due to growing concern over its contribution to climate change. New pulverized coal generation without a solution for carbon emission is facing increasing difficulties securing permits due to climate concerns. According to the International Energy Agency, carbon capture and sequestration technology is not likely to be commercially available until after 2020 and will require substantial CO₂ prices to break even. Even if these environmental issues can be avoided by developers of conventional coal in the short term, the effort will add to the already lengthy development cycle of 48-60 months.

Public opinion on climate issues seems to have passed the tipping point. Proposed coal projects are having increasing difficulty in obtaining permits for construction. In October 2007, the Kansas Board of Health and Environment turned down a permit application for a new 700 MW coal plant citing concerns over greenhouse gas emissions. While the state legislature has twice passed bills allowing the permit to be issued, it has not been able to gather enough votes to override Governor Kathleen Sebelius' veto. Fear of reactions like this has led to the cancellation of almost 30 GW of proposed coal plants since the start of 2007. Further, on March 11th, Congressmen Henry Waxman & Edward Markey introduced the Moratorium on Uncontrolled Power Plants Act of 2008 that, if passed, would effectively ban new coal plants from being built without state of the art control technology to capture and store emissions of carbon dioxide.

When we look past conventional pulverized coal, the options to supply the additional 260 TWh needed by 2015 start to carry higher costs and greater uncertainties.

Nuclear Generation Isn't Relevant Until After 2015

Nuclear development carries unique uncertainties due to the extremely long planning and construction times. For instance, NRG Energy plans to bring its two reactors online in seven years from today. Such a long development cycle not only makes nuclear unlikely to impact the 2015 supply stack, but also makes nuclear economics very sensitive to delays, financing structure, and quality of offtake customers, further complicating the development decision.

In the near term, the significant technical and regulatory uncertainties make the business case for advanced coal and nuclear unclear. Only the most optimistic scenarios make these technologies part of this new supply equation before 2015.

Natural Gas Comes to the Rescue?

Without new coal and nuclear capacity, natural gas is the next major option for new capacity additions. Gas fired combined cycle technology is a very efficient and mature technology that can be brought online in 24 to 36 months. In comparison to coal, gas combined cycle plants offer immediate environmental benefits emitting CO₂ at about one-third the rate of conventional coal plants.

However, fuel supply is the key uncertainty. The EIA projects that LNG imports will grow from 2% of supply in 2006 to 9% in 2015. The implication is that accommodating LNG will require not only new regasification capacity to be built on our shores, but also new liquefaction capacity to be built where the gas is; the Middle East, Russia, Africa and Southeast Asia. Even assuming the required LNG infrastructure is built, gas prices will have to rise to either attract LNG cargoes away from Europe, or to cover development of increasingly costly domestic supplies.

Renewables and Energy Efficiency are in the Country's Best Interest

Energy efficiency and renewable generation should have a much greater contribution to filling the US supply gap. The EU has committed to a goal of deriving 20% of its power supply from renewables. This in addition to a goal of 20% reduction in energy demand growth through energy efficiency.

Energy efficiency can be a key lever for policy makers to manage energy supply needs in the context of responsible environmental policy. The US has both the European experience as well as significant efforts in California and Texas to refer to in designing effective measures for energy efficiency. Key lessons learned are that energy efficiency measures take time to be effective. The State of California and Austin Energy in Texas have each had efficiency measures in place for over two decades. Each has achieved more than a 10% reduction in energy growth as a result of their proactive efficiency programs. Establishing and strengthening energy efficiency standards is a key step in managing long term energy supply. However, even with the entire US being as effective as California at efficiency, 247 TWh (or about 60 GW) would still be needed to fill the supply gap by 2015.

Renewable generation offers several key advantages over gas generation. CO₂ emissions and fuel exposure are avoided entirely. Additionally, the development cycle is shorter, and several technologies are becoming cost competitive, particularly if the cost of CO₂ is considered. As gas prices rise, wind in particular becomes a viable source of energy in competition with gas. At typical US capacity factors and current gas prices, wind already competes with gas generation given available transmission capacity and current tax credit support (Figure 1).

Integration of renewables into the existing power systems is not without problems. Intermittency must be managed and transmission assets must be built. But the European experience has shown that technical solutions exist to integrate intermittent resources and finding compromises between multiple jurisdictions is possible. The argument that renewable resources cause substantial integration problems is difficult to defend in light of the significantly higher penetration rates of renewables in other countries (Figure 2).

As the US prepares to invest billions of dollars in new generating capacity to meet its electricity supply needs through 2015, decision makers and market players should factor in all of these issues.

The US has vast natural resources which it can use sustainably to tackle this challenge. Clearer direction and stable regulatory structure is critical to bring this potential to reality. The result will be adequate reserve margins, reduced fossil fuel dependency, greater security of supply while reducing the power industry's impact on climate change.

Figure 1. Non-hydro renewables' share of country generation mix. Source: Horizon Wind Energy analysis

Figure 2. Wind competes with gas as fuel costs rise. Source: Horizon Wind Energy analysis