Benchmarks
A Brighter Outlook for New Coal-Fired Generation
May 15, 2003
By Betsy S. Vaninetti
Higher natural gas prices could be a boon for new development.
In the fall of 2001, Platts Research & Consulting (PR&C)/RDI's New Coal-Fired Generation: The Race Is On study projected the addition of approximately 11,000 MW of new coal-fired capacity in the United States by 2015. However, the latest projections from the RDI Outlook for Power Research Service, a service of PR&C, paint a brighter picture. According to revised estimates, PR&C's projection for coal capacity development has doubled-to just over 22,000 MW by 2014. What's contributing to coal's brighter outlook?
The RDI Outlook for Power models nearly 280,000 MW of new generating capacity that will be required between 2002 and 2014, with a more intense need for peaking capacity in the early years of the forecast period. New gas combustion turbine units make up 30 percent to 50 percent of the annual capacity additions in 2002 and 2003. This number falls dramatically as the demand for electricity continues to grow and a distinct need for baseload capacity emerges in the marketplace.
By 2009, coal-fired generating capacity makes up 20 percent to 25 percent of the total annual capacity additions-a strong contrast to the earlier years of the forecast period when new coal capacity makes up less than 10 percent of the new capacity additions.
In the short term, decreased demand for electricity caused by the slowdown and the corresponding declines in natural gas prices may have made some wary of the viability of certain coal-fired projects. However, a recovery in wholesale electricity prices is expected to begin around 2005 for most regions of the country, driven in part by an increase in capacity prices as the market absorbs excess generating capacity. However, the downturn in the economy may actually bode well for new coal-fired generation over the longer term, as poor economic conditions have caused an increase in both the amount of cancellations of new generating projects and in suspicions regarding the practicality of the "get-rich-quick" merchant power strategy.
PR&C estimates that almost 33,000 MW of capacity will retire over the forecast period, of which approximately 23,000 MW is nuclear capacity that will not be relicensed for economic or safety reasons. This reduction in baseload generating capacity provides an opportunity for new baseload capacity to come on line. Much of this capacity is located in the Southeast and Midwest markets, where PR&C is projecting some of the strongest growth for new coal. In addition to the spate of retirements, PR&C has tracked almost 98,000 MW of announced project cancellations.
We project that, as the economy begins to recover and electricity demand increases, increased utilization of new gas-fired capacity will increase the overall demand for natural gas going forward. To meet this elevated demand, higher-cost sources, such as Canadian and liquefied natural gas, will make up an increasingly larger portion of the supply, causing higher long-term natural gas prices. Between 2009 and 2015, PR&C projects that natural gas prices will likely move in the $3.50-$4.50/mmBtu range (in nominal terms). Gas prices at these levels will encourage the development of new coal-fired generation.
Betsy Vaninetti is a senior consultant with Platts Research & Consulting in Boulder, Colo.
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