Energy Industry Trends

The U.S. Power Industry Faces Billion-Dollar Investment Decisions

Issue Table of Contents

The U.S. Power Industry Faces Billion-Dollar Investment Decisions The Nuclear Dilemma: Q&A with CERA’s Jone-Lin Wang Refiners Face a New Marketplace

According to a report released late last year by Cambridge Energy Research Associates, Inc. (CERA), an IHS company, the U.S. power business faces two key challenges. First, power price shocks are being met by political backlash in several states, as power companies try to pass high fuel costs on to retail customers. Second, demand growth will swallow the current generating capacity surplus in two to six years for most regions. Since the lead times for new power plants and transmission lines can be long, decisions need to be made soon as to when and what to build.

“But many power markets, especially the deregulated competitive markets, lack appropriate rules to provide incentives to build the next wave of generation,” says Jone-Lin Wang, senior director and head of research for CERA’s North American Electric Power service. She points out that while in regulated areas utilities work with regulators on resource planning and can generally recover their capital investments through rate regulation, companies in deregulated markets who are relying on market prices may be leery of making the long-term investments needed to ensure supply down the road due to the substantial uncertainties regarding future market rules. It seems that the backlash against price shocks is diverting attention from the pressing issue of setting stable and healthy rules for competitive power markets.

Further complicating the matter is the question of the type of plants to build. In the 1990s, most utilities focused on building gas-fired plants, and for good reason: natural gas burns cleaner than coal and, until recently, was relatively inexpensive. But rising natural gas prices are forcing many utilities to look for other options.

“Gas prices averaged just a little over $2 per million BTUs throughout the 1990s,” says Wang. “And if you look at gas-fired plants at $2, $3, or even $4, there was no reason to build other types of power plants. But now, nobody is expecting natural gas prices to go down to that kind of level. Gas may come down toward $4 but it won’t stay there. We believe the long-term gas price will fluctuate according to the international development of liquefied natural gas, something around the order of $6 or higher. At that price, coal and even nuclear become competitive.”

Already there are signs that coal is making a comeback. Even though the construction of new coal-fired plants nearly ground to a halt in the early 1990s, the tide has turned. Today, 7 GW of new coal plants are under construction while another 25 GW are under development. And concerns about carbon emissions are looming ever larger: a recent survey of CEOs conducted by CERA indicates that more than 80 percent of them expect the imposition of restrictions on carbon emissions in the United States within ten years. Although all new coal plants are being designed to emit a minimum amount of sulfur dioxide and nitrogen oxide, all coal plants—existing and new—will emit carbon. Sequestration and storage of carbon is technically feasible, but large-scale commercial use is still at least ten years away.

As coal, nuclear, and even wind generation gain popularity among utilities, gas-fired plants will continue to be built. With a lead time of approximately five years, combined-cycle gas-fired plants are far quicker to build than coal plants, which can take seven years, and nuclear plants, which can take 10 years or longer. Even with this quicker timetable for gas-fired plants, will there be enough capacity built in time to meet growing demand? According to Wang, the industry needs to move quickly if it is to avoid a supply shortage several years from now.

Subscribe to eNewsletter