BY THE NUMBERS: EVA, Inc. – Combined Cycle Journal


Gas, wind dominate announced US capacity additions

With the emergence of ‘game-changing’ shale gas, inframarginal rent in both the gas and power industries has changed dramatically. This phenomenon has had a significant impact on plans for new generating capacity.

By Adam Picketts, Energy Ventures Analysis Inc

Relatively low gas prices, combined with a heightened shale-gas production outlook, will continue to reduce inframarginal rent for owners of coal-fired assets (Sidebar 1). As inframarginal rent declines, coal retirements will accelerate because existing plants cannot compete with gas—especially if pressured to retrofit flue-gas desulfurization and selective catalytic reduction systems to reduce emissions of SO2 and NOx.
FGD and SCR retrofits cost roughly $900/kW for a 400-MW coal-fired unit versus $850-900/kW to construct a new combined-cycle plant. The latter estimate excludes the cost of financing and assumes non-union construction in a moderate climate. More specifically, the total cost for one western 2 x 1 F-class combined cycle with air-cooled condensers and scheduled for spring startup is $1400/kW in round numbers.
Coal retirements totaling 16 GW through 2016 have been announced. EVA (Sidebar 2) projects that about 36 GW are at risk and will likely retire. Pending EPA regulations—such as the unit-specific emission-rate limitations associated with the Air Toxics Rule—are another driver of coal retirements. Although remote, the possibility of carbon legislation after 2017 also will keep coal capacity on a downward trajectory.
Expect coal-to-gas fuel switching to grow and reduce the generation share of coal as well. Low gas prices and global growth in coal demand, combined with a weak US dollar, make it uneconomical for old, inefficient coal units to dispatch ahead of gas-fired combined cycles.
Coal-to-gas fuel switching is largely an Eastern phenomenon impacting old, unscrubbed units burning high-cost Appalachian coal. Assuming natural gas becomes the base-load fuel in the East, EVA projects the maximum amount of coal generation lost to gas could be equivalent to roughly 3 billion ft3/day (bcfd). This equates to a loss of 85 million tons of coal per year. EVA forecasts around 2 bcfd of gas generation will offset coal in 2011. This fuel switching equates to a loss of 52 million tons of coal.
Announced new coal capacity through 2016 is 16.6 GW. EVA estimates that only the few coal plants currently under construction or fully permitted (8.1 GW) will reach commercialization. These coal additions will offset only 23% of projected retired coal capacity during this period.
Wind. There are currently 83 GW of announced wind capacity additions through 2016, driven by renewable portfolio standards in 30 states and DC. However, EVA projects only about 18 GW of new wind capacity will be installed through 2016. Uncertainty over future wind production tax credits, transmission constraints, financing, and power purchase agreements will severely limit installed wind capacity.
Tax-credit uncertainty was evident in 2010 and it led to the six-month period of lowest installed wind capacity since 2007. With the tax credit extension lasting only through 2012, developers will again face financing difficulties in 2013. EVA forecasts that wind will generate 4% of US retail electric sales by 2016.
Expect additional development of GT-based projects to fill losses in coal and to offset the difference between rated and credited wind-turbine capacity. Cycling capacity will be vital in balancing wind intermittency to better correlate generation with load. Announced GT technology additions through 2016 are 67.5 GW, 80% of that combined cycle.
US retail electric sales grew by about 4.3% last year, largely driven by climate as heating degree days were 114% of the 30-year trailing normal. EVA expects demand to decline by 0.98% in 2011 and remain relatively stagnant with yearly growth of roughly 0.85% to 1.2% through 2016, absent any unusual weather events.
Across all fuels and technologies, capacity announcements for calendar years 2011-2016 total 186 GW (Fig 1). GT-based simple-cycle, cogeneration, and combined-cycle plants account for 36% of this total. Although announced nameplate wind capacity is 83 GW, wind power producers are not credited with providing firm capacity. EVA estimates that roughly 8 GW of announced wind would be credited capacity.
GT technologies will be required to help fill the void between rated and credited wind capacity. In the nuclear arena, aside from 1961 MW of expected uprate applications, new nuclear capacity is unlikely before 2017.
Fig 2 presents the recent history and a look ahead for GT-based capacity. The illustration shows the spectacular growth of this industry sector in the 1999-2005 period, when more than 200 GW was installed.
A federal renewable portfolio standard for electricity will keep GT capacity on the near-term radar to provide a more reliable backup to wind-powered generation and to quickly fill sudden demand gaps as the economy rebounds.
EVA’s tracking of power project announcements indicates that 56% of the GT-based capacity expected in service by the 2016 is in the early development stage (Fig 3). These plants are the most vulnerable to changes in developers’ plans. Another 18% of capacity is in advanced development and an additional 25% is under construction.
As part of its tracking program, EVA monitors each phase of every project as it winds through the development process. Each project is assigned a development category number that corresponds to its level of progress (Sidebar 3). CCJ.

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1. Inframarginal rent

So-called “inframarginal rent” is the profit that a power producer captures between its marginal cost of production and that of the generator with the highest marginal cost, which sets the market price.
Example: High gas prices push combined cycles back to the margin, meaning the power producer delivers kilowatt-hours to the grid at essentially its cost of generation (no profit). Meanwhile, base-load coal-fired plants operating on lower-cost primary energy receive for their electricity a price equal to the marginal generator’s cost.
By contrast, low gas prices reduce the inframarginal rents for coal-plant owners because coal is no longer as competitive as it was when the price of gas was high. In some cases, the cost of gas on a heating-value basis drops to where it becomes the most economic base-load fuel, pushing coal to the margin and minimal profitability.

2. Who is EVA?

Energy Ventures Analysis Inc (EVA), Arlington, Va, specializes in energy and environmental market analysis and forecasting associated with the power, natural gas, coal, oil, and emissions markets. It also assists clients in the formation, execution, negotiation, and litigation of major fuel and transportation contracts, as well as in the purchase and sale of electric power assets. Adam Picketts can be reached at, or at 703-276-8900.

3. EVA’s project tracking methodology

Today’s mixed bag of regulation and deregulation make it far more difficult to access information on power-project development than in the regulated era. EVA has continually tracked announcements of changes to powerplant capacity since 1998. This includes new plants, retirements, uprates, and derates by fuel type in six distinct stages of development.
To track project development in a consistent and orderly fashion, EVA designates each project into one of the following six categories that rank progress towards completion: In operation (Category 1); under construction (2); advanced development stage (3); early development stage (4); unlikely (5); and withdrawn (6). EVA’s seasonal methodology counts capacity in service by June 1 only; units added thereafter are attributed to the following year.
Categories 1, 2, and 6 are straightforward and easily observable. New projects often, but not always, start with public introductions by the developers themselves. When first announced, natural-gas-fired and renewable-energy projects are assigned to Category 4. New coal and nuclear projects initially are assigned to Category 5 because of the difficulties associated with building these two types of plants.
During the early-development phase, project information often is difficult to access. However, EVA retains its initial ranking for at least as long as the developer continues to pursue the project actively. Distinctive qualitative attributes relate to a particular project’s progress through the development phase.
A project advances to Category 3 when it has fulfilled most, if not all, of the basic elements necessary for construction—for example, permitting, financing, and orders for major equipment. A project may be moved back a category, if it misses targeted milestones or other indicators that point to a lapse in development activity—such as no site identified. Category 6 is assigned when the developer formally withdraws the project.

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