Article by Mark Griffith and Greg Hopper
It's not a crystal ball, but Black & Veatch's Energy Market Perspective service is the next best thing for providing 25-year projections of wholesale electricity, greenhouse gases, natural gas and power fuel prices. The service provides a long-term outlook for North American energy markets, and Black & Veatch is using it to provide clients with much-needed insight and decision support in this time of uncertainty.
Scott Smith, Black & Veatch Vice President, Energy Strategy, said the Energy Market Perspective provides an analytically neutral market view.
Significant findings from the Energy Market Perspective analysis include:
1. New generation resources for electric power will be focused on renewable energy, natural gas and nuclear power.
More than ever, new resource additions in the electric power industry are expected to be dictated by a host of energy policies and regulations. Capital costs, fuel costs and operating costs will be significant factors. Carbon emission regulations, as well as renewable portfolio standards (RPSs), will also play a role, according to Mark Griffith, Black & Veatch Managing Director and Market Analysis Practice Co-Lead.
"It seems very likely that we will see passage in the U.S. of some form of greenhouse gas legislation in 2009 or 2010," Griffith said. "We won't know the full impact of this until after the legislation is made into law, but it is reasonable to assume that it will severely restrict the development of new conventional coal generation resources. In our market analysis, we assume that U.S. coal-fired projects well along in their development cycle will be completed, but after that, any new coal-fired generation will have to include carbon capture and sequestration, which is currently very expensive."
2. Natural gas prices are likely to recover fairly quickly.
Energy Market Perspective analysis indicates natural gas prices in North America will return to the $6 range within the next year or two. Natural gas combined cycle technology will be able to compete with coal, depending on carbon costs and gas prices. Gas-fired combined cycle power plants have lower capital costs and lower carbon emission rates, making them potentially competitive with conventional coal-fired technology, depending on long-term gas prices.
"Our analysis indicates that recovery in gas prices does not have to wait for a full recovery in gas demand," said Greg Hopper, Black & Veatch Managing Director and Market Analysis Practice Co-Lead. "Much of the new natural gas hitting the market is being produced from 'unconventional' resources, particularly gas shale formations. These new wells deplete very quickly, so we expect the supply of natural gas will drop in the next year, placing upward pressure on natural gas prices."
3. There will be rapid growth in energy from renewable resources.
The Energy Market Perspective includes a quadrupling of renewable energy resources in the U.S., much of it occurring in the next 10 years. But it is not enough to significantly reduce carbon emissions from the electric energy sector of the economy, according to Griffith. Renewable energy developers receive various federal and state tax credits, but RPSs are set at the state level. More than a third of the states have no standards yet.
"There is a significant chance that a U.S. national RPS will be set sometime this year or next, which would serve to provide developers with a more level playing field when it comes to meeting mandated 'green energy' content," Griffith said. "That, combined with the various tax incentives from this year's U.S. stimulus bill and mandated carbon emissions caps from a greenhouse gas bill, would provide the industry with a 'hard target.' That can then be folded into our next Energy Market Perspective, which we plan on issuing in the fall of this year."
"Black & Veatch's Energy Market Perspective draws from the vast resources available within the company," Smith said. "Our expertise in transmission systems and engineering, renewables and independent engineering, as well as our understanding of upstream gas and oil fuel analyses, provides a broad and powerful knowledge base on which we are able to draw."
The underlying analytical approach is designed to build a consistent framework for assessing uncertainties in energy, emissions and infrastructure regulations, as well as evaluating investment strategies. The Energy Market Perspective provides a starting point for sensitivity and strategic analysis – for example, a change in assumed natural gas prices, or an evaluation of a client's strategy within the energy markets. Black & Veatch can use the service to evaluate the robustness of a strategy by creating multiple test or stress cases.
"Energy Market Perspective provides the ability, not only to analyze power and fuel markets across North America, but for our clients to have a base case view to use as a starting point for their own analyses," Hopper said.
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