Navigant Research Blog

In Golden Age, Natural Gas Becomes Generation Workhorse

— March 9, 2015

The promised golden age of natural gas has begun to take hold globally. Fortunately, rising natural gas demand will not require a corresponding increase in infrastructure spending across the United States, according to a recent report from the U.S. Department of Energy. These findings hold even as the U.S. electric power sector—currently the largest consumer of natural gas in the country—saw generation from natural gas replace that of coal in recent months. This corresponds with a sharp increase in demand for natural gas from multiple end-use sectors.

With the Henry Hub reference price for natural gas in the United States lingering below $5 per million Btu (mmBtu) since the early part of 2014, a demand surge is expected to continue across the power generation sector.

Renewables and Gas

The United States, already the largest consumer of natural gas in the world, is expected to see a 33% increase in demand by 2040, according to the U.S. Energy Information Administration’s Annual Energy Outlook 2014 reference case. Growth is expected to be 42% for the electric power sector between 2012 and 2040 under the same scenario.

Living up to its promise as a bridge fuel to a low carbon future, natural gas is helping backfill baseload generation, especially in areas where coal plant retirements are highest. The combination of wind or solar power and gas-fired generation, meanwhile, has emerged as an option for states looking for more access to lower-carbon electricity. This hybrid approach is playing out across the expansive areas of the West, where electrical grid transmission bottlenecks have made it difficult to export renewable generation from areas of high productivity (e.g., Wyoming) to population centers on the West Coast, for example.

Not Laying Pipe

The increased use of natural gas in the electric power sector, however, is not without potential challenges. Unlike competing fuels, natural gas is delivered as it is consumed, and cannot be stored onsite like coal. Furthermore, adequate infrastructure is needed to maintain electric system reliability. The investment of $65 billion in new interstate pipeline construction over the past 18 years appears to be sufficient to deliver natural gas from producing regions to end users across the country without substantial new investment.

Unlike the U.S. electrical grid, natural gas power plants and natural gas production are both broadly distributed rather than geographically concentrated, reducing constraints on interstate pipeline capacity. What’s more, lower-cost investment options, such as improving the utilization of existing infrastructure and rerouting gas flows, are far cheaper than building new pipelines.

As the U.S. power sector faces several concurrent transitions—retirement of coal-fired generation, aging electrical transmission infrastructure, and a surge in the use of intermittent renewables—these findings suggest that natural gas will continue its emergence as the workhouse on the modern electrical grid.

 

The Geopolitics of Energy Efficiency

— January 15, 2015

The crisis in Ukraine has put the country’s energy security at risk.  Among other threats to the country’s economic stability, natural gas supply is a lingering concern.  In December, Naftogaz, Ukraine’s state-owned gas company, managed to settle the $3.1 billion debt it owed to Russia’s Gazprom, averting the risk of gas supply being shut down.  Longer term, there’s a little noticed solution: investing in energy efficiency could help Ukraine avoid importing any gas from Russia.

According to the International Energy Agency, Ukraine’s energy intensity is nearly 3 times greater than the average for Organisation for Economic Co-operation and Development (OECD) countries and 25% greater than the average for non-OECD European and Eurasian countries.  Energy efficiency has not been a priority in the former Soviet republics.  Subsidies provided by the gas monopoly that were designed to keep the populace complacent also created a disincentive to upgrade Soviet-era equipment and controls.

After the Fall

After the fall of the Berlin Wall, many of the same problems plaguing Ukraine were faced by East Germans.  But, since reunification, hundreds of buildings with poor thermal characteristics in East Germany have been demolished and replaced with more efficient ones.  Additionally, in the buildings that remain, major upgrades were made to the thermal envelope and heating systems were replaced.  As a result, total energy use in Germany fell between 1996 and 2008.

To be sure, some modernization projects are happening in Ukraine.  In Odessa, upgrades to a district heating network provided total energy savings of 50%.  But antiquated heating systems in Ukraine suffer from years of neglected maintenance.  In addition to the equipment, heating controls are an issue.  Many systems only have basic on-off control, they are either heating at full blast or are off – a terribly wasteful limitation.    Easy efficiency investment opportunities with short paybacks are abundant in Ukraine.  But, as with many energy efficiency investments, financing is the hurdle.  The problem is especially acute in Ukraine, as loans from the International Monetary Fund are keeping the country afloat.

Future of Financing

Worldwide, major changes in financing options seem to be in store for 2015, aimed at lowering the cash needed for energy efficient investments.  By converting upfront capital investments into operating savings through innovative finance, more projects will get the green light.  To date, energy service companies (ESCOs) have served as the primary means of outside funding for energy efficiency improvement projects.  But new approaches, such as independent energy savings insurance products, are beginning to emerge.  Currently, private real estate fund managers have $110 billion of equity available for investment, an all-time high.  As the situation in Ukraine demonstrated, there are abundant opportunities for investment being overlooked.  The changing world of energy efficiency financing appears to be the clearest way to bridge that gap.

 

Will Coal Plant Retirements and Fracking Threaten Electric Reliability?

— December 17, 2014

The implications of the rapid retirement of much of the U.S. coal generation fleet are just coming to light, and transmission operators and generation utilities are actively discussing and planning on contingencies that could cause a real threat to reliability and availability in many regions across the nation.  (The issues around retiring and decommissioning coal plants were discussed in Navigant Research’s research brief, Coal Plant Decommissioning.)  Compounding the threat of coal generation plant retirements is a short-term shortage of coal in many regions of the nation.

The U.S. Environmental Protection Agency (EPA) announced its proposed Clean Power Plan (CPP) rule in June 2014.  It’s expected that the final rule will be announced in June 2015.  The CPP targets CO2 emissions by existing fossil-fueled electric generation and sets targeted reductions for each state.  The plan, as currently proposed, mandates 30% reductions in carbon emissions by 2030 from 2005 levels.

The proposed plan also gives each state flexibility to develop its own approach as to how it will meet the targets, including retiring problematic coal and other fossil fuel generation, adding renewables, such as wind or solar generation, or increasing levels of demand response and energy efficiency programs, which the recent EPA mandates may accelerate.

Time to Plan

Most people do not understand the issues that will arise in the Midwest and the southeastern United States as a result of coal generation plant retirements.  The North American Electric Reliability Corporation (NERC) discusses the implications at length in a recent paper on the impact of generation plant retirements based on the CPP.  NERC concludes the paper by suggesting that states immediately start operational and planning scenario studies, addressing resource adequacy, transmission adequacy, dynamic stability, and  economic and reliability impacts.  This must be done to demonstrate reliability and to ensure that plans of action are technically achievable within the stated time requirements.  “States that largely rely on fossil-fuel resources might need to make significant changes to their power systems to meet the EPA’s target for carbon reductions while maintaining system reliability,” the NERC authors conclude.

Supplies Down

In the near term, another related reliability threat is looming: the availability of coal to fuel the generation plants operating today.  Having formed a new trade group called the Western Coal Traffic League, Midwestern utilities are frustrated because their normal coal supplies from western U.S. coal producers have kept utilities from rebuilding stockpiles burned during last year’s cold winter. Compounding the effect, record harvests, economic growth, and growing oil shipments from the country’s booming oil fracking industry in in the upper Midwest are constraining the rail system.

The effective implementation of the CPP, along with tight supplies of coal, will make for an interesting winter in many parts of the United States.

 

As Demand Soars, Construction of LNG Terminals Booms

— November 24, 2014

International marine construction companies are seeing a bonanza of new projects as countries around the world approve massive new terminals for liquefied natural gas (LNG) – for imports in most cases, and for exports from North America, Australia, and some Southeast Asian countries.  Altogether, this frenzy of port building could amount to hundreds of billions of dollars over the next decade as seaborne trade in LNG climbs to meet spiraling demand, particularly in the energy-hungry countries of China, India, and other Asian nations.

Total deliveries of LNG were flat in 2013 compared to 2012, according to the BG Group, but this masks pent-up demand, as producers in the United States are ramping up export capacity and importing countries are scrambling to build import terminals.  BG Group forecasts that worldwide LNG demand is expected to increase at a rate of 5% annually through 2025, with much higher rates in the developing countries of Asia.

North America

In September, the U.S. Federal Energy Regulatory Commission (FERC) gave final approval to the Cove Point LNG facility, overruling the objections of environmental groups and bringing to four the number of U.S. export terminals officially approved and under construction.  All told, 14 terminals are seeking approval by federal regulators in the United States, on the Gulf Coast, the East Coast, and the Pacific Northwest.  The Northwest facilities, in particular, face fierce opposition from environmentalists opposed to the increased fracking that large quantities of U.S. exports will entail.  With big potential markets waiting not only across the Pacific, but also in Europe, U.S. oil & gas companies and their representatives in Washington, D.C. are eager for more export capacity to come online.  There are also at least a dozen LNG terminals proposed along the coast of British Columbia.

Europe

With unrest in Ukraine giving rise to fears of disruptions of natural gas supplies from Russia, which provides 30% of Europe’s natural gas, European governments and companies are scrambling to build new import facilities.  Paradoxically, with international supplies limited and with Japan, which relies more heavily on imported natural gas for its energy supply than any other country, soaking up much of the available supply at inflated prices, imports to Europe have declined in the last couple of years.  The Gate terminal on the North Sea coast near Rotterdam was built with the support of the Dutch government to maintain the Netherlands’ status as a regional gas hub.  It is now running at 10% of capacity, according to The Economist.

Nevertheless, imports from the United States are sure to increase, and the European Union sees the construction of new import terminals as a critical matter of regional energy security.  Lithuania, for example, is due to open a massive new floating terminal this year or in early 2015.  New terminals are especially important along Europe’s vulnerable southeastern coast, as currently countries in the area are essentially captive customers to Russia’s Gazprom.

Amos Hochstein, the acting U.S. special envoy and coordinator for international energy affairs, testified recently before the Senate Foreign Relations Committee, saying that “[there is a] critical need for Europe to improve its energy infrastructure by constructing new pipelines, upgrading interconnectors to allow bidirectional flow, and building new LNG terminals to diversify fuel sources … We support proposals to build LNG terminals at critical points on European coasts, from Poland to Croatia to the Baltics.”

Asia

The biggest building boom is underway in China, where three import new terminals came online in 2013 and at least two more are expected begin operation before the end of this year.  Already, half of the world’s capacity for regasification (the conversion of LNG to conventional natural gas, for transport by pipeline) is located in Asia.

“China’s imports of liquefied natural gas (LNG) are growing at a record pace,” reported Reuters earlier this year, “as it aims to use cleaner fuels to cut smog in big cities, creating a powerful new source of demand that has the potential to reshape the market for the super-chilled gas.”  China’s LNG imports grew 35% in the first quarter of this year compared to the same period in 2013.

Meanwhile, new production is emerging from Southeast Asia, particularly in Indonesia and Papua New Guinea.  Also, Singapore, which sits at the mouth of the Strait of Malacca, through which passes more than half of the world’s seaborne LNG, has formed ambitious plans to be the LNG trading hub for Southeast and East Asia.

These LNG terminals tend to cost around $10 billion apiece.  It’s a good time to be in the business of building them.

 

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