Power Companies May Be Forced To Embrace Shale-Gas Boom
March 12, 2010
U.S. power companies aren't ready to buy into the boom in shale gas but may have to.
Burned in the past by natural-gas price volatility and uneasy with relying too heavily on one fuel, power company executives at the IHS Cambridge Energy Research Associates annual conference say they are taking a measured approach to dramatic advancements in gas production from shale rock. Their demurral stands in contrast to oil and gas executives gathered at the week-long conference in Houston who are heralding the boom as transformative.
Yet, constructing other types of electric generation--from nuclear to renewables--faces challenges, including higher costs and regulatory uncertainties. Although generators are leery of gas, the fuel could become their default choice as power demand recovers and older, dirty coal plants are shuttered.
"The power business doesn't have the luxury of not doing anything," said Lawrence Makovich, a senior adviser at IHS CERA who focuses on power.
The construction of gas generation blossomed early last decade as low commodity prices and the ease to construct the plants made the technology popular. But price spikes provoked by tight supplies and concerns over an overbuild dried up much of the new construction.
Natural gas prices plunged last year, reaching their lowest level in more than seven years, as producers unlocked vast new supplies of the fuel from dense, natural gas-rich rock formations known as shales. The new supplies created a glut of gas, boosting U.S. gas stockpiles to an all-time high in November. Now international oil companies such as Exxon Mobil Corp. (XOM), which have struggled to increase their crude reserves, are doubling down on natural gas, saying that it will be at the core of the world's future energy consumption.
Power company executives said too much focus on gas-fired generation is the wrong approach, particularly in an industry that must look decades out in making decisions on what kind of generation to build.
Michael Morris, chairman and chief executive of American Electric Power Co. (AEP), on the sidelines of CERA Week, said environmental concerns over shale production are just starting to emerge, while gas plants provide only a temporary solution to concerns over greenhouse-gas emissions linked to climate change.
Burning gas emits half as much carbon dioxide as coal, which has the potential of a great short-term reduction in heat-trapping, greenhouse-gas emissions. But in two decades, when expected greenhouse-gas limits would become stricter, these plants will have to go through a wave of retrofitting or shutdown.
"We need to be careful about thinking the entire thing gets solved by cheap and stable gas," said Theodore Craver, chairman and chief executive of Edison International (EIX), during the conference.
Yet, Craver added, cheaper gas prices--a product of the shale-gas boom--led to cheaper wholesale power prices, making renewables uneconomic to build. In addition, renewables such as wind and solar, which utilities have to build to comply with state requirements, need quick-starting back up generation--and that's typically natural gas plants.
Other forms of generation face imposing hurdles as well. New coal-fired plants aren't being built due to uncertainty about CO2 regulations. Nuclear power is getting renewed consideration, but AEP's Morris said only a few states such as Georgia, Florida and Kansas have the regulatory structure to make these massive projects possible.
The uncertainties facing generation development come as power demand begins to recover and coal-fired generators consider shutting down older plants in the face of tighter federal regulations on mercury and other traditional pollutants.
"For the foreseeable future you see people adding gas plants to back up the wind and keep up with demand," Makovich said.
Source: Dow Jones Newswires
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