ENERGY
Figure 1
U.S. Electric Generation in thousand Mwh’s
4,200,000
4,000,000
3,800,000
3,600,000
3,400,000
3,200,000
1997
3,000,000
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Energy Information Administration, Electric Power Monthly, March 27, 2012, Table 1. 1. Net Generation by Energy Source
and a national recession, the nascent
merchant electric business began its
first downturn in 2002 and is currently
experiencing a second downturn. As
with any relatively young industry, much
remains to be learned. A detailed review
of current market dynamics follows.
an issue. State utility commissions have
a long history of generally favorable
cost recovery for state- or federal-mandated pollution compliance.
in turn has been impacted by higher
diesel fuel prices. Transportation costs
make up a much larger portion of total
fuel cost for coal than they do for natural
gas. Most recently, coal prices have been
moderating on tightening EPA rules.
Lagging Demand. Electricity demand
in the U.S. has been greatly affected
by the recent recession and lagging
economic growth (Figure 1). Following
years of historical electricity demand
growth of almost 2 percent per year,
improved energy conservation, more-efficient appliances, improved lighting,
and better energy management in
building design may collectively
temper growth going forward.
Additionally, the EPA in March proposed
New Source Performance Standards
(NSPS) governing carbon emissions,
which could effectively stop the
construction of new coal-fired plants
that do not use carbon sequestration
technology, even though the technology
is commercially unproven. Pending rules
that would regulate electric plant cooling
water have introduced even more
uncertainty for both plant development
and valuation of existing power plants.
At the same time, the cost associated
with finding natural gas has fallen due
to vast improvements in technology.
Hydraulic fracturing technology,
commonly known as fracking; horizontal
drilling; and a higher density of well
perforations have made shale formations
much more economical to exploit.
Other factors are weighing on long-term demand as well. The cost of
solar energy has continued its steady
decline, and some industry participants
think that solar generation will achieve
non-tax-incented economic parity
within a few years. Solar also is ripe
for self-generation, which could
fundamentally alter the central power
station concept of merchant generation.
Natural Gas Prices. The price of natural
gas has fallen relative to coal, and a
perception that prices will remain low
for the long term has prompted fuel
switching from coal to natural gas. While
coal prices have dipped recently, they
have displayed a slow but pronounced
increase over the past decade. Part of this
has been due to growth in metallurgical
coal exports. Also, coal prices are affected
by the cost of rail transportation, which
According to the U.S. Energy
Information Administration, total
marketed production grew by an
estimated 4. 8 billion cubic feet (BCF) per
day in 2011, a 7. 8 percent increase and
the largest year-over-year volumetric
increase in history. The Henry Hub
spot price averaged $2.50 per 1 million
Btu in February, the lowest average
monthly price since 2002 (Figure 2).
continued on page 22
Figure 2
EPA Regulation. Three recent
pronouncements have affected the
value of coal-fired resources. The EPA’s
Cross-State Air Pollution Rule (CSAPR)
and its Mercury and Air Toxics Standards
(MATS) have accelerated the retirement
of many coal-fired power plants due
to the cost of retrofitting older plants
with additional pollution controls
mandated by those regulations. In
deregulated environments, incremental
power prices may only cover a portion
of the costs for those systems. For
regulated utilities, this is much less of
Coal Cost per Million Btu
$2.50
$2.00
$1.50
$1.00
$0.50
2002
$0
2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Energy Information Administration, Electric Power Monthly Table 4. 3., March 27, 2012,
Receipts, Average Cost, and Quality of Fossil Fuels: Independent Power Producers
Journal of
Corporate
Renewal
Jul/Aug
2012
