But Some Stress Source Diversity as Essential Moving Forward
Tamar Hallerman
GHG Monitor
05/25/12
Many coal-heavy electric generating utilities are betting on natural gas as the way to comply with a series of upcoming Environmental Protection Agency regulations, but several companies are also looking to diversify their portfolios in order to safeguard against any future regulations or interruptions. EPA’s recently-finalized Mercury and Air Toxics Standards (MATS) and Cross-State Air Pollution Rule (CSAPR) require utilities to install relatively expensive pollution-control technology like baghouses and scrubbers to cut down on toxic emissions like mercury, sulfur dioxide and nitrogen oxide. In order to comply with the rules, many utilities that have traditionally been reliant on coal generation—including American Electric Power (AEP) and Southern Company—have said they are now looking to new-build natural gas-fired generation instead of coal retrofits. Collectively, those moves are leading to a major shift in the power generation sector.
At a recent Platts conference on EPA regulations held this week in Washington, officials from several coal-reliant utilities said they are looking mostly to natural gas to solve their generation woes. “There’s clearly a quick and strong move towards natural gas for power generation in this country,” said AEP Vice President of Environmental Services John McManus. “The significance of [MATS] on our coal fleet is pretty significant.” The coal powerhouse announced earlier this year that it plans to shutter 4,600 MW worth of coal capacity—roughly 20 percent of its fleet—mainly in response to MACT and CSAPR, and instead will be looking to natural gas to replace some of that lost capacity. Constellation Energy Chief Environmental Officer Paul Allen said that the utility, before being purchased by Exelon, opted to phase out its smaller coal fleet in favor of more natural gas and renewable-powered generation. “As we reckon with the implications of this whole gas supply change and the continued reasonably buoyant price of coal, we will see this continued theme about the trend towards cleaner units,” Allen said.
Southern Company also said that it is aiming to install natural gas capacity instead of coal retrofits to fill holes in its fleet due to MACT and CSAPR. Danny Herrin, Southern’s manager of Climate and Environmental Strategies, said that between 2005 and 2012 the utility has reversed its generation from majority coal with some gas to the opposite scenario. He said that in 2005, the company generation portfolio was comprised of 71 percent coal and 11 percent natural gas. “In 2012 our expectation is we’ll be about 35 percent coal and about 47 percent gas. So we’ve made a total turnover since 2005 because of gas prices and environmental reform,” he said. To date, Herrin said the company has spent upwards of $8 billion on environmental controls, an amount he said will likely “increase significantly” in order to comply with newer EPA regulations such as MATS.
Utilities Also Look to Diversify Portfolio
Several utility officials speaking at the conference indicated that their companies are also looking to develop alternative sources of generation beyond gas to diversify their portfolios and ensure that they are not once again reliant on a single source for electricity generation like many were with coal. In particular, some officials stressed they were wary of both EPA’s intentions to later regulate emissions from natural gas generation as well as the potential for price spikes for natural gas. “We don’t want to get into a situation where instead of being fairly heavily dependent on coal we switch that to being totally dependent on natural gas and then [vulnerable] to the volatility of that fuel,” McManus said.
Doug McFarlan, senior vice president for Public Affairs and Communications at Edison Mission Group, said the company is moving quickly away from coal and more towards a mix of wind and natural gas. “We’ve been diversifying our portfolio for several years now and we’ve had explosive growth in our wind and gas portfolio for the last several years,” McFarlan said. Notably, one of the company’s subsidiaries, Midwest Generation, recently announced plans to shutter more than 1,200 MW of coal-fired generation in Illinois and Pennsylvania, about 17 percent of the company’s fleet. “At the end of the day, the way we’ve approached compliance is we’ve been trying to defer capital expense decisions as far to the right, if you will, as we can and compress construction schedules,” he said.
Allen said that previous assumptions about the gas market’s price volatility are beginning to wither away due to steadily low prices over the last two years. However, he said some utility sector experts still have doubts. “For those of us who have been in this for 20 years, we have had an assumption about the cyclicality of gas that seems this time to be meaningfully different because of advances in technology, the location of the shale plays in relative proximity to load. Having said all that, it’s still the case, particularly in markets that are as much market-driven as the natural gas market is that the answer to low prices tends to be low prices just as the answer to high prices tends to be high prices, and we think we’re beginning to see some of that,” Allen said.
