Stephen P. ReynoldsPresident & CEO
Pacific Gas Transmission Co.
Two or three years ago, gas-fired generation was hailed as a cure-all for everything that ailed the natural gas industry. Now it is being suggested with equal conviction that electric restructuring and/or the demise of PURPA will actually slow the growth in demand for natural gas.
What caused this shift? Part of it is uncertainty. Until we figure out who is going to own generating assets and what this new regulatory regime is going to look like, there might be a "go slow" period for new gas-fired generation.
Adding to the uncertainty is the possibility of a sell-off of old, depreciated generating assets. If the new owners repower those old clunkers and sell the electricity at cheap rates, they might dampen enthusiasm for building new gas-fired generation.
Given the current attitude in Washington, former PURPA machines with their long-term contracts face a very uncertain future. Whether they are dismantled or required to reprice their power, there won't be a lot of new PURPA plants built. That might also slow the pace of gas penetration of the electric generation market.
And then there are transition costs. The FERC NOPR on electric restructuring suggests that everyone will be invited to pay a share of whatever it costs to shake uneconomic assets out of the system. Those surcharges could be a barrier to entry for new generating assets (em gas and otherwise.
But regionally, I am quite optimistic about the future of natural gas. In the Northwest (em which up to now has only flirted with natural gas as a fuel for electric generation (em natural gas is an appropriate choice in an environmentally sensitive region. It's available, it's low cost, and the costs keep dropping all the time.
Should pipelines get in the electricity business? I think most pipelines have recognized that their charter to operate a broad, vertically integrated fuel business has expired. As they look for new business opportunities, electric generation makes a good deal of sense. Power generation is related to our overall business, we know the virtues of natural gas as a fuel source, and new generating assets bring growth opportunities to our core pipeline business. Rather than waiting for the load to come to us, electric generation is a way to bring the load to our own system.
Erroll B. Davis, Jr.
President & CEO
Wisconsin Power & Light Co.
Natural gas is the fuel of choice in Wisconsin for meeting peak electric generation needs. As we build new generation to meet peak, small gas-fired units are a clear preference. However, over the next five years we will continue to see a high reliance on existing coal units in the Midwest because an excess of coal capacity exists elsewhere in the region.
It should be pointed out that use of gas for electric generation in the Midwest does not translate into huge volumes of gas consumed. Gas-fired generation constitutes 22 percent of WP&L's inplace capacity, yet represents only 0.4 percent of the Btu input into our plants for electric generation purposes.
James A. Carrigg
Chairman, President, & CEO
New York State Electric & Gas Corp.
There is a very mixed outlook for gas-fired power generation over the next five years. There is likely to be little new construction of baseload electric capacity over this period. Certain existing gas-fired plants that are currently nondispatchable will likely become dispatchable. This, in turn, will lower their capacity factors and, therefore, their gas use. Offsetting this decline will be the conversion of certain coal and oil units to gas because of environmental considerations. The net result of gains and losses will be no change from the current gas use amount.
PURPA repeal will have no impact on gas consumption. In the past, state commissions mandated high-priced electric contracts between NUGs and utilities under the aegis of PURPA. Those mandates are now gone and new
electric plants will have to be competitive with or without PURPA.
As regards wholesale and retail wheeling, regulatory restructuring will likely reduce gas use in the short-term. As the electric industry restructures, higher-price NUG contracts will be renegotiated. This will result in a number of gas-fired units either being retired or seeing their capacity factors reduced. This has already started.
Patrick J. Maher
Chairman & CEO
Washington Gas Light Co.
The transitional path to a
market-driven electric industry is not known, but the path will be taken. It is tempting to think about PURPA repeal or one regulatory regime or another (em "PoolCo," for example (em and conclude that gas-fired generation will go up or down. Either scenario is possible. But think about what the electric industry will look like five years from now. Market and political forces will have given rise to consolidation and vertical disintegration, and the new regulatory and legal rules of a rocky road will have produced leaner, more competitive companies. In that environment, demand will be up and gas should certainly compete, not only for generation, but at the burnertip. Gas can also substitute for electric cooling.
Beverly A. Wharton
President, Gas Division
MidAmerican Energy Co.
The deregulation of electric generation will proceed much faster as a result of the Energy Policy Act of 1992 (EPAct). This will cause investors in gas-fired generation to delay projects until critical issues like the availability, location, and cost of generating facilities are resolved. We believe the marketplace reaction to EPAct will be more significant for gas-fired generation than any Congressional action on the repeal or modification of PURPA.
Once the availability, location, and cost situations stabilize, any new generation will not, in our opinion, be biased toward coal, because the longer lead times for coal-fired generation will increase commercial risks appreciably. A competitive electric generation market will not accept such increased risks, even given coal's much lower commodity cost.
All participants in the natural gas industry should be allowed the opportunity to serve gas-fired generation or become a power generator if they so choose. The one able to provide the most responsive and cost-effective service should serve the generating plant. Only by permitting such marketplace efficiency will the natural gas industry increase its share of the electric generation market.
James Schretter
Senior Vice President
C.C. Pace Resources, Inc.
The future growth of gas-fired power generation depends on load growth, efficiency improvements, and the price of natural gas relative to other fuels. Past utility concerns about price volatility and the deliverability of the natural gas system appear to be fading with time. The real question is "When will new generation be needed?"
Energy supplies go in cycles, and new generation will be needed over the next 5-10 years. Natural gas will capture a respectable share of this market. Improvements in the efficiencies of gas-fired units will assist in this trend. However, the deliverability of natural gas during peak electric times constitutes a major challenge for the pipeline and natural gas supply industry.
Today's natural gas-fired generation industry is nothing like it
was in the past. Traditional,
nonrecourse funding for long-term utility power sales agreements has changed. The success of future projects will require more equity, higher risk, and sophisticated customer marketing. PURPA is currently a small part in the creation of new generation assets.
Gas-fired power generation will continue, based on its strong underlying economics, but the owners' balance sheets will be larger, their determination will be tested, customer relations will be critical, and project success will be subject to more doubt.
Gary G. Ely
Vice President, Natural Gas
Washington Water Power Co.
The future of gas-fired power generation depends on several factors. First, there's the relationship between delivered natural gas costs and the costs of alternative generation. Certainly, the deregulation of the electric industry will create pressure for all forms of generation to reduce costs. If Congress repeals PURPA, that will reduce costs of alternate generation, simply by forcing PURPA alternatives to compete.
Given these possible scenarios, the outlook for the growth of gas-fired power generation will remain flat to fairly low. The bias for coal or any fuel or alternative form of power generation will
depend on the variable production costs.
Gas pipelines should only become power generators if they possess the assets and knowledge to produce and market power competitively to the grid.
B. Jeanine Hull
Vice President &
Assistant General Counsel
LG&E Power, Inc.
I see a continued bright outlook for market-driven innovative uses of high-efficiency gas-fired technology.
Intended or not, I believe the FERC's and Congress' actions to encourage competitive markets will place an even higher premium on efficiency. Gas-fired technologies can be expected to continue to do well in such an environment.
The bias is not for coal or gas but for customer choice. Customers will decide what they want in terms of risk, supply, and fuel type. Competitive, market-driven concerns will influence those choices more than any inherent bias for an individual fuel type.
Power generators have, however, noted with some concern the FERC's current restrictions on shippers' ability to manage firm transportation agreements in an efficient and market-responsive manner. Greater flexibility in managing these contracts could materially enhance our ability to use natural gas in new power generation projects.
If gas pipelines want to become power generators, they should be subject to the same functional
unbundling standard that most parties agree electric utilities should meet. We support functional unbundling as an alternative to forced divestiture for electric utilities and would support the same approach for gas utilities and pipelines.
D. Louis Peoples
Vice Chairman & CEO
Orange and Rockland Utilities, Inc.
Orange and Rockland is optimistic about the future of gas-fired power generation. Our view is tempered, however, by our commitment to balance fuel sources for the purposes of reliability, security, and economy.
In the long term, the economic benefit of natural gas as a fuel for electric generation, enhanced by deregulation and coupled with the environmental advantages of gas, will most likely result in new gas-fired electric generation facilities and further conversions to natural gas. However, this transition will be determined in large measure by how federal and state regulators allow recovery of capital outlays.
If there is a bias for coal, it's due predominantly to geography. Some utilities are limited by the environmental constraints of coal as a fuel source and by the cost of coal transportation. Utilities in other regions have a plentiful supply within affordable reach and operate under more relaxed environmental restrictions.
From the perspective of electric consumers, there is no compelling reason for pipelines to become power generators. However, the financial implications of supply and demand may cause pipeline companies to pursue such ventures. If the projected increase in gas production continues to exceed the projected increase in gas consumption, gas producers
may seek to create additional
end-users (em such as their own electric generation units (em to maintain price margins.
Eugene R. McGrath
Chairman
Consolidated Edison Co. of New York, Inc.
Forecasts of excess generating capacity for the northeast over at least the next decade indicate that any growth of gas-fired generation will probably come from coal-to-gas conversions of existing units, rather than new construction. We have not seen a bias for coal in New York. However, as concern about lack of fuel diversity increases, a bias for coal will increase.
Michael Baly
President & CEO
American Gas Association
FERC action in the electric industry restructuring proceeding probably will have a significant influence on how much natural gas is used in electric generation. At least as important, however, is regulatory activity at the state level, where commissions are considering direct retail access for consumers to competing electricity supplies. Increased competition as well as regulatory and market uncertainty will slow the construction of new generation facilities. Competition will provide an incentive for existing generators to do everything possible to increase output from existing facilities, including coal and nuclear, that can displace gas generation.
Nonetheless, gas-fired generation remains the most economic alternative to meet new requirements. Competition will force generation companies to put aside any remaining coal bias and rely instead on the superior economics and efficiency of electricity generated from gas. A.G.A. believes that demand in the electricity sector, including independent power producers, will grow from 3.1 quadrillion Btu in 1994 to at least 3.9 quads of natural gas annually by 2010.
Dean T. Casaday
President & CEO
Pennsylvania Gas and Water Co.
The 1990 Clean Air Act, along with the deregulation of the electric industry, will provide natural gas with numerous opportunities for growth in the area of power generation. For example, small-scale gas cogeneration projects can be strategically placed in an electric utility's service territory, providing added capacity and generation diversity, and using waste heat on site. In addition, natural gas power plants can be sited and on line in a fraction of the time it takes to place coal- or nuclear-fired plants in service. Because natural gas is environmentally benign, it can help coal-fired power plants meet the Clean Air Act standards more economically.
Deregulation of electric markets, and the removal of barriers hindering market entrance (i.e., repeal of PURPA), will definitely help the gas industry. Deregulation at the national level must be accompanied by deregulation at the state level. If players are not hindered by particular state regulations, the most efficient source of power generation will evolve, and in many cases this will be natural gas. This must be also be followed by a repeal of any state requirement that favors a native fuel, such as coal.
As to whether gas pipelines should become power generators, we must look at how these entities have been eliminated from the gas merchant function. For the most part, they have developed marketing subsidiaries to sell natural gas. Many of these same parties are presently filing to be marketers of electricity (em as are many independent brokers. With the deregulation of the gas and electric industries, pipelines, utilities, or independent companies should all have the opportunity to become power generators.
Robert B. Catell
President & CEO, Brooklyn Union
Chairman, American Gas Association
The gas-fired power generation market will be an important source of natural gas demand growth, even as the restructuring of the electric industry continues. Success may be more difficult than many people believe due to the competitive nature of the wholesale electric market. There is a lot of potential, but our ability to compete successfully may depend upon the form of electric deregulation and the repeal of PURPA. We need to continue our strong efforts on other direct-fired natural gas end-use applications. Combined residential and commercial demand in 1994 exceeded the previously reported all-time high achieved in 1972, and growing demand in the direct-fired end-use market must remain a high priority. Growing gas demand in all markets helps maintain a healthy exploration and production industry segment and offers the opportunity to more fully utilize the existing pipeline infrastructure, thereby keeping transmission costs as low as possible, making natural gas more competitive in the marketplace.
Jerald V. Halvorsen
President
Interstate Natural Gas
Association of America
Natural gas has been and continues to be an important fuel supply for electric generation, both for traditional electric utilities and the newer NUG market. Natural gas has much to offer electric generation, and we expect the market for gas-fired generation to continue to grow.
With a couple dozen utilities already embracing open access, and more preparing open-access filings, the competition genie is out of the bottle. All it will take is a few states with considerably cheaper electricity (em fired by gas (em to motivate the other state commissions to not only allow, but encourage, competition in order to retain industry, jobs, and the tax base that go with them. Exactly what FERC does with its NOPR, or Congress does with PURPA, may influence the pace but not the final outcome, which we perceive as good for the natural gas industry in the long run.
We do not so much perceive a bias for coal as a familiarity between utilities and coal that comes with many years of use. The gas industry has taken steps to offer the kinds of services electric utilities need, at prices that will beat coal by a penny or two per kilowatt. Even if there is a bias toward coal, it would cost utilities too dearly in a competitive generation market for the bias to be sustained.
Should gas pipelines become power generators? Many already have. However, as with any other nonjurisdictional activity, pipelines will spin such activities off to an affiliate rather than do it themselves. That system appears to have worked well in gathering and gas marketing. Pipelines are getting into the business of selling and pipelines move gas (em whether the Btus take the form of burnertip methane or electricity in wires.
William J. Grealis
President
Gas Business Unit, Cinergy Corp.
Gas-fired generation is perhaps the most apparent opportunity for the gas industry in the deregulation of the electric industry. We have probably seen the last of the large central station generating units. The growth in supply in the future will come from smaller generating units that have lower capital costs and are designed to meet specific needs. In many instances, they will be cogeneration facilities located with electric end users. Gas can be the fuel source for a significant portion of this new generation, much of which will be built by nontraditional companies.
However, excess capacity, lower prices, and more efficient use of existing plants through regional market-based economic dispatch all mean fewer opportunities to build new generation over the next decade. There is no bias in the marketplace in favor of any fuel (em all fuels will compete strictly on cost per kilowatt produced. But even the most efficient new gas-fired combustion turbine has higher marginal costs than the baseload coal plants that will dictate the market price for the overwhelming majority of hours.
Michael G. Morris
President & CEO
Consumers Power Co.
Being a combination utility, we have a unique view about the demand for additional electrical generation. It is clear that the demand profile continues to increase throughout the United States and in the East Central Area Reliability states. Compounding this undeniable fact is the reality that most electric utilities remain somewhat concerned over long-term asset answers to this coming shortfall when nothing but uncertainty rules their future.
Natural gas is the fuel to fill this need, given the shorter cycle time required to build natural gas generation and the cost advantage that natural gas enjoys. Therefore, with or without regulatory change at the state or federal level, natural gas will maintain its advantage over other fuels and technologies.
Natural gas pipelines should enter the competitive electrical generation field only if they truly comprehend the risks and rewards. The days of building a facility and force-selling to the franchised electric utility are clearly in the past. Generation will resemble the wellhead end of the natural gas industry (em very competitive with low thresholds to entry, as compared to the electrical delivery system.
Charles E. Zeigler, Jr.
Chairman, President, & CEO
Public Service Co. of North Carolina
The outlook for gas-fired power generation in our market territory is very positive in the mid to long term (four to 15 years), assuming that current market growth projections are realized. While legislative and FERC actions will significantly affect power generation opportunities, we believe this opportunity is more dependent on market growth and the natural gas industry's ability to compete with alternative fuel sources. In the long term, successful power producers will pursue those options that serve their market requirements at the lowest reasonable cost. If natural gas or any other fuel can accomplish this more effectively than coal, then any existing bias for coal will be overcome. Environmental concerns will also be a deciding factor that should favor natural gas.
.Pp
Corbin A. McNeill, Jr.
President & CEO
PECO Energy Co.
The Northeast will have a capacity glut for at least the next five years. New electric generating capacity will be limited. At PECO Energy, three oil units were converted for operating flexibility with natural gas. We believe other utilities will choose to convert to dual fuel as well. Neither industry deregulation nor the repeal of PURPA is an issue for gas-fired electric generation. Some small cogenerating units will continue to be developed. The increase in generation using natural gas may slow in the next decade due to gas price increases and coal price decreases. After that, distributed generation, which could include fuel cells, will be a gas resource. PECO Energy believes natural gas pipelines should remain autonomous. t
Articles found on this page are available to Internet subscribers only. For more information about obtaining a username and password, please call our Customer Service Department at 1-800-368-5001.