Energy Supply, Demand, and Markets – August 2014

The ScottMadden Energy Industry Update | August 2014

Eventually, a tectonic shift causes change. A shifting generation mix—triggered by stricter environmental regimes (proposed and in effect) and continued cheap shale gas—is impending, with significant changes in the U.S. generation fleet expected in the next one to two years. Renewable and nuclear development continues, although some development is impacted by stop-go policy incentives. Meanwhile, gas infrastructure is under pressure to keep up as it becomes the power generation incremental fuel of choice. Read more below.

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  • Fossil-Fired Generation: Ninth Inning for Some Units
  • CSAPR** Resurrected: On April 29, the U.S. Supreme Court reversed a lower courts earlier vacatur of CSAPR. While CSAPR was vacated, predecessor CAIR** served as a placeholder of sorts, and generators were focused on MATS compliance EPA has moved to reinstate CSAPR Phase I beginning 2015 Generators must now establish compliance strategies Wrestled to the MATS: Upheld on appeals weeks before CSAPR verdict, the more stringent MATS (2015 initial deadline) has been the major driver for coal retrofit/retirement plans Gas on Coal: With gas prices up from $3.00 to $4.50/MMBTU, demand has increased for domestic thermal coal (vs. 2012 when gas prices stayed below $3/MMBTU) and higher demand has buoyed prices for all domestic thermal coal Life after Death: Last winter, as gas prices spiked during the polar vortex and gas-fired generators experienced reliability issues, coal-fired generation proved critical for system reliability. Some ISOs are rethinking planned retirements
  • A Big Wave of Retirements in 2015, with More Retiring Before 2024
  • Notes: *Ventyx projections depict announced years (if applicable) and modeled years by unit type and age if no announcement has been made; **CSAPR is Cross-State Air Pollution Rule; CAIR is Clean Air Interstate Rule; ***Prices are average delivered prices at electric generating plants (incl. taxes) by month per EIA Sources: ScottMadden analysis; Ventyx; SNL Energy; Sanford C. Bernstein & Co; EIA, Monthly Energy Review (Jul. 2014) (Table 9.9, Cost of Fossil Fuel Receipts at Electric Generating Plants)
  • Announced and Projected*
  • Sources: ScottMadden analysis; EIA data
  • Sources: ScottMadden analysis; Ventyx

    • Fossil-Fired Generation: Are Proposed Existing Source Greenhouse Gas Standards the Nail in the Coffin?
    • The Top 50 CO2 Emitting Plants Are Sizeable Plants Which Provide Baseload Generation for Nearly All Regions in the U.S.
    • The Incremental Impact of the EPA GHG ESPS (beyond MATS) Remains To Be Seen New CO2 regulations could scramble the calculus of planned investment in back-end air quality control systems, adding to already costly plans for installations and upgrades and leading owners to the conclusion that their coal generators are simply too expensive to operate Or, in lieu of the fact that the investments have already been made to comply with MATS, coal generators could stick it out, particularly if it looks like implementation will be delayed by litigation for years
    • Reduced rates inside the fence can be achieved by improving efficiency
    • Notes: *Maximum average interim state-level goal from 20202029 and maximum goal for 2030 and thereafter outlined in the EPAs Clean Power Plan (including all four building blocks inside the fence and outside the fence). **Plants with units fueled primarily by fuels other than coal are highlighted Sources: ScottMadden analysis; Ventyx; SNL Energy; Sanford C. Bernstein & Co
    • Fuels**


  • Coal & Oil
  • Coal & Gas
  • Re-dispatch to lower-emitting plants may decrease capacity factors, increasing $/MWH and changing duty cycles and maintenance challenges
  • Maximum 20202029 Emission Rate*
  • Maximum 2030 Emission Rate*

  • Progress and Prospects for New Nuclear
  • Small Modular Reactors (SMRs): SMRs still garner much discussion, but progress is halting and there is more demonstration than commercialization Babcock & Wilcox announced in April 2014 it was reducing its investment in SMRs because of a lack of investor interest: its mPower effort had been an industry leader In May, DOE awarded NuScale Power up to $217M in matching funds over a five-year period to perform engineering and testing leading up to its first planned project in Idaho Waste: Waste uncertainty remains an issue In response to a federal appeals court ruling, NRCs waste confidence** decision and temporary storage rule invalidated in 2012 NRC expected to issue a Generic Environmental Impact Statement (GEIS) and suspend final licensing decisions pending issuance of statement; litigation can be expected Market Conditions: Market conditions remain challenging for nuclear in some regions Failure of Exelon units to clear PJMs 201718 capacity auction highlights continued market challenges for nuclear Natural gas prices remain low, affecting the bid of marginal generators and the margins of nuclear power Nuclear operators continue to point to the capacity market rules that fail to reward significant (in size), firm power operation
  • Progress on New Reactor Construction in the United States
  • Were going to have to have base power to meet the projected increases in electricity demand in the future and the best source, which produces no greenhouse gases, is nuclear power. Christine Whitman, former EPA Administrator
  • Notes: *SNL Financial estimate; **Waste confidence refers to the assurance of long-term, environmentally safe storage Sources: Chattanooga Times Free Press; SNL Financial; Nuclear News; industry news

  • Renewables Development: More Steel (and Modules) in the Ground, But Policy Uncertainty Remains a Barrier
  • U.S. Annual and Cumulative Wind Power Capacity Growth (Utility-Scale Wind)
  • Notes: *RPS means renewable portfolio standard; PTC means production tax credit; ITC means investment tax credit; REIT means real estate investment trust; PACE means property assessed clean energy Sources: Industry news; Greentech Media; American Wind Energy Association

    • Renewables Development: More Steel (and Modules) in the Ground (Contd)
    • Notes: *RPS means renewable portfolio standard; PTC means production tax credit; ITC means investment tax credit; REIT means real estate investment trust; PACE means property assessed clean energy Sources: Industry news; Greentech Media; American Wind Energy Association
    • Weighted Average System Price (right axis)
    • ~100MW

~50MW ~10MW

    • Residential
    • Non-Residential
    • Utility
    • U.S. Annual PV Capacity and Average System Price (20092013)
    • $10.00

$0.00 $8.00 $6.00 $4.00 $2.00

    • $12.00

W-dc 5,000 0 4,000 3,000 2,000 1,000

    • Capacity (MW-dc)

2009 2010 2011 2012 2013

  • Note: Sub-groupings are approximate
  • 435 MW
  • 852 MW
  • 1,919 MW
  • 3,369 MW
  • 4,751 MW
  • Solar capacity has expanded rapidly in Germany as part of its Energiewende. In September 2014, the Solar Electric Power Association (SEPA) and supporting partner, ScottMadden, will lead a group of 25 U.S. energy industry executives to the bellwether energy market of Germany to exchange information with electricity and solar market leaders who are adapting to change in this dynamic and controversial environment. Learn more about our findings in our next Energy Industry Update.

In March 2014, INGAA released a study examining what gas and liquids midstream infrastructure would be required with expanded North American unconventional natural gas and crude oil supplies, particularly supplies from shale formations Key findings included the following: Nearly 40 BCF/day of new inter-regional pipeline capacity is needed by 2035, with more than 23 BCF/day from 2014 to 2020 Production increases are greatest in the Marcellus production area, and the shale plays in the Southwest (TX, NM, OK, AR, and LA) and Western Canada Most significant production and market growth is expected to occur in the next 5 to 10 years Of a projected $640B (2012$) of total midstream capital expenditures (including gas, NGL, and oil pipeline infrastructure) needed for North America during the 20142035 period, about $255B is required for U.S. natural gas midstream investment (excl. $58B in Canada)

  • Natural Gas Midstream Infrastructure: Much Thought To Be NeededIs Enough Happening?
  • Sources: INGAA Foundation Report; Pipeline & Gas Journal; SNL Financial; ScottMadden analysis
  • Natural Gas Production Expansion and Midstream Infrastructure Needs: A Stylized Display
  • In INGAAs base case, about 15,500 miles/year of new pipe is needed. Most of this is gathering line. An average of about 1,650 miles of new gas transmission line are added each year: roughly 850 miles/year of mainline miles and about 800 miles/year for lateral connections, mostly to power plants, processing plants, and gas storage fields.

  • Natural Gas Midstream Infrastructure: Much Thought To Be NeededIs Enough Happening? (Contd)
  • Notes: *The INGAA Foundation Report base case estimates that average annual completions of 800 miles each of mainline and lateral pipeline and 13,800 miles of gathering line is needed Sources: INGAA Foundation Report; Pipeline & Gas Journal; SNL Financial; FERC Office of Energy Projects, Energy Infrastructure Updates (20092014); ScottMadden analysis

  • Power Demand and Prices: Peakier and More Volatile?
  • Notes: Implied spark spreads based upon 7 MMBTU/MWh heat rate and calculated using on-peak pricing Sources: FER Staff, 2013 State of the Markets (Mar. 20, 2014); Macquarie; SunTrust Robinson Humphrey; Ventyx; SNL Financial; industry news; ScottMadden analysis
  • Firming Spark Spreads?
  • $93.80
  • Power Prices Have Been Trending Upward Since 2012
  • Power Demand Is Peakier in Texas, New England, But Trending That Way in Other Regions
  • Spark Spreads Remain Volatile from Quarter to Quarter, But a Firming Trend May Be Emerging
  • Source: SunTrust Robinson Humphrey
  • Source: SunTrust Robinson Humphrey
  • Source: Ventyx

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