POWER January 2011 - 44

2011 INDUSTRY FORECAST
Wrestling with Gorillas
The five major infrastructure issues that are looming large
prompted one Black & Veatch analyst to refer to them as the
" five 800-pound gorillas " who are squaring off with utilities. The
wrestling match might not be pretty. Considerable expenditures of
capital and management attention will be needed to keep them
under control.
Carbon Dioxide. Coal-fired power stations produced a third of
total carbon dioxide (CO2) emissions in 2008, while gasoline-fueled
automobiles churned out nearly one-fifth of CO2 emissions. During
the past few years, the electric utility industry has moved from
denial, to grudging acceptance after the 2006 congressional election,
to an attempted end run after the 2008 election, to a seeming
decision prior to the 2010 election to get on with life after the
government lays down the new rules.
Clean coal technologies, renewables, and carbon capture and sequestration
have all been touted; all are expensive and unproven on
the large scale that would be required. Congress is lagging behind the
industry on the need to reduce uncertainty on this issue.
Energy Storage. Electricity can be stored, but storage is expensive.
The stakes have been raised a few notches by the regulatory
push for renewables, which are generally variable. Transmission
capacity from renewable sources to load centers is often inadequate.
Distributed storage (see the next gorilla) might help.
Electric Automobiles. Is the electric car too good to be true? It
will reduce oil imports and greenhouse gas emissions even if power
companies keep the same fuel mix. The cars, if recharged at night,
would consume off-peak power and, eventually, could even double as
portable energy storage devices.
In some ways, this is too good to be true. For starters, much of
the existing distribution equipment in the utility system needs to
cool down at night, so a boom in electric car sales might require
the replacement of parts of the distribution grid. And if electric
cars start to capture significant market share and a large number
of owners find that they need to recharge during peak periods, the
utility network could really face new peak loading problems on the
distribution grid.
Natural Gas. Proven reserves (those that are economically recoverable
with current technology) of conventional and unconventional
natural gas could last 100 years at the current rate of consumption,
and the resource boundaries are being extended in key shale gas
regions every day. Prices have declined, and the spread between
coal and gas has substantially narrowed since 2008, bringing prices
ever closer to parity on a Btu basis.
At the beginning of November last year, coal was approximately
72% of the price of natural gas, which is a substantial shift from the
beginning of 2007, when coal was about 26% of the price of gas.
These numbers reflect simple commodity prices and not the cost of
fuel at the burner tip. Nevertheless, if this relationship is sustained, it
raises questions: What are power generators going to do about their
fuel sources going forward? What are the long-term implications for
coal, nuclear power, and gas supply?
Shale gas production will likely enjoy quasi-manufacturing productivity
gains for some time, with the resource base remaining basically
stable or expanding. There is no inherent reason why coal should be
cheaper than gas, depending on the cost of production.
January 2011 | POWER
1. Moderate expectations. Most utility managers expect
modest growth in electric power demand over the next 10 years.
Source: Black & Veatch 2009-2010 Strategic Directions in the
Electric Utility Industry Survey
Investor-owned utilities
100
50
45
40
35
30
25
20
15
10
5
Flat
<1% 1%-1.5% 1.5%-2% <2%
<0%
Demand growth (average per year growth over the next 10 years)
Another view holds that most investors are not going to assume
that gas stays this cheap relative to coal; they expect that, in the long
run, gas prices will increase in real terms. Either way, utilities are now
emphasizing gas-fired capacity for its greater flexibility and to avoid
potential greenhouse gas regulations.
Uncertain Demand for Electricity. Will economic activity bounce
back up to the former trend line, or will it grow from a lower level,
indicating that the recession permanently destroyed demand? (U.S.
net power generation grew 3.4% during the first six months of 2010
compared with the same period in 2009, although this was still 1.6%
less than the first half of 2008, the U.S. Energy Information Administration
reported.)
Black & Veatch's 2009-2010 Strategic Directions in the Utility Industry
Survey, which took the pulse of hundreds of utility executives
across the U.S., showed that nearly 80% of respondents from investorowned
utilities and 70% from munis see load growing by either less
than 1% or by 1% to 1.5% a year over the next 10 years. More than
70% of respondents from both sectors feel that long-term revenue
growth will resume at a slower rate, even after the economy turns up
(Figure 1).
The answer to the demand growth question means a lot to electricity,
coal, and natural gas producers because demand for their products
follows the economy. During and after the energy crisis of the 1970s,
the energy intensity of the economy ratcheted down, shifting the relationship
between energy demand and economic growth. The U.S.
government predicts that this time the gross domestic product/energy
relationship will tighten up again, as even less energy will be required
to fuel economic growth.
What do energy executives do when facing such uncertainty?
They talk about energy conservation and cutting carbon emissions.
Then they cut capital expenditures. They do not know what
kind of power plant will pass the test for acceptability, assuming
that they know they need one. They eschew long-term commitments
and, if possible, act only after getting regulatory approval.
Investors want less uncertainty.
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POWER January 2011

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