Utilities are Scrubbing Their Generation Portfolios

Ken Silverstein | Feb 21, 2012

 

If not older coal technology, then what is the future of electric generation? That’s the question that many utilities are asking themselves as well as their regulators and their customers. And while the most conspicuous answer is a smooth transition over to natural gas, it is not the only solution.

Natural gas is the path of least resistance. The technological risks are few while the construction and permitting risks are minimal. But as the fuel continues to gain market share, some key issues are emerging and namely whether the pipeline infrastructure can support such an expansion as well as the effect that greater consumption will have on prices. To that end, exploring a broad portfolio of fuel options is smart.

“My own bias is that natural gas, or shale gas, displaces coal,” says Mark Kinevan, vice president of energy trading and chief operating officer for The Energy Authority in Jacksonville Fla., who will be a panelist at the EnergyBiz Leadership Forum in March. “But the best approach is to manage the risks by diversifying. I’ve seen all the cycles up and down and trying to predict and forecast what will happen is a fool’s game. There are too many variables and too much uncertainty.”

When the United States was going through the electrification process in the 1940s and 1950s, base-load coal plants were prevalent and they have enabled prosperity. Today, roughly 540 coal plants exist here that are responsible for generating about 45 percent of this country’s electricity. That’s coming from an asset base in which 35 percent of the facilities are older than 40 years, which is past their expected lifespan.

Consider Duke Energy: It will be retiring about 3,000 megawatts of older coal units because it makes no economic sense to put pollution controls on them. To help replace that generation, it is building two natural gas combined cycle plants in the Carolinas while it will be firing up a 618 megawatt coal gasification facility in September in Indiana. That plant took an existing 160 megawatt coal plant and converted it -- a $3 billion public-private effort.

“We acknowledge that generating electricity can be done cleaner,” says Doug Esamann, president of Duke Energy Indiana, who will also be a panelist at the EnergyBiz forum. It’s part of Duke’s long-term energy strategy.

Managing Risks

Older, pulverized coal-fired plants are the least efficient units with about 35 percent of the energy input converted to electricity. But if coal gasification is used, the efficiencies would reach as high as 60 percent. The early attempts to implement  such technology had iffy results, however, today’s models are much more effective. They have greater productivity and fewer emissions while the carbon is more concentrated and thus easier to potentially capture.

Esamann says that one of the most challenging aspects of making the shift to a cleaner-burning portfolio is keeping industrial customers informed. They are concerned with reliability and costs. But he emphasizes that those businesses have had decades of stable, low-cost rates and that the plants that have supplied that power are aging. “Now we are at a point in time when we need to clean up.”

Edison Mission Energy, which has a regulated utility in Southern California and which operates unregulated merchant facilities across the country, has a similar viewpoint. Its modern, merchant plants operate in a multitude of states and ones in Illinois, Pennsylvania and Wyoming use a lot of coal. In addition to the company’s geographic diversity, it also wants to incorporate a mix of fuels.

“It will be tough to build something other than natural gas plants, given the current environmental rules, capacity factors and low prices,” says Aram Sogomonian, vice president of risk management for Edison Mission Energy, who will also speak at the EnergyBiz forum. Prices are now in the $3 to $4 per million Btu range, however, if they reach the $6 level, the scenario would change, he adds.

What happens when utilities start relying on natural gas? Prices, of course, would be expected to rise while the nation would have to invest in more pipelines to carry the additional fuel. Those utilities dependent upon the energy source would then have to hedge that risk by entering into long-term fixed pricing contracts while others may want to invest in or own natural gas wells, the panelists say.

“You examine the different strategies. You make a decision. You manage it,” says Sogomonian.

If natural gas is the chosen path, utilities would plan accordingly. But the prudent step, albeit the more difficult one, is to incorporate broader fuel options to avoid events not yet envisioned.

EnergyBiz Insider is the Winner of the 2011 Online Column category awarded by Media Industry News, MIN. Ken Silverstein has also been named one of the Top Economics Journalists by Wall Street Economists.

Follow Ken on  www.twitter.com/ken_silverstein

energybizinsider@energycentral.com

To hear Mark Kinevan, Doug Esamann and Aram Sogomonian discuss these issues, attend the EnergyBiz Leadership Forum, coming to Washington, DC March 19-21st.
www.energybizforum.com