POWER January 2016 - 36

Policy
2016 INDUSTRY FORECAST
Natural Gas Prices,
Regulation to
Reshape U.S.
Generation
Jasmin Melvin, Jonathan Nelson, George McGuirk, and
Jeff Ryser
T
he near-simultaneous surge in U.S.
natural gas production and recent enactment
of environmental regulations
will usher U.S. power supply from reliance
on coal to increased usage of natural gas
and renewables.
U.S. natural gas production began a now
decade-long period of growth around 2005,
driven by shale gas discoveries and improved
drilling technologies. Production steadily
rose over that period from below 50 Bcf/d to
above 70 Bcf/d.
In late November 2015, ongoing high production
and sluggish demand pushed gas in
storage to record levels and above the 4 trillion
cubic feet psychological barrier (see the
online version of this article at powermag.
com for charts). This abundance of supply
has pushed prices to historic lows below $2/
MMBtu, which has increased the fuel's competitiveness
for power generation. The trend
will likely continue next year, with Bentek
Energy forecasting production near 80 Bcf/d
by the end of 2017.
Regulations Favor Gas,
Renewables
If not scuttled by legislative or legal attacks,
new U.S. environmental regulations will be
another factor that continues to steer generation
away from coal toward natural gas, and
also renewables.
Under the Environmental Protection
Agency's (EPA's) Clean Power Plan (CPP),
states must develop plans for achieving interim
carbon reduction goals by 2022 and
final goals targeting a 32% drop from 2005
levels in the existing generation fleet's carbon
emissions by 2030. Efforts opposing
this landmark regulation are seen largely
as symbolic, as the White House is certain
to veto any legislation attacking the CPP or
other elements of President Barack Obama's
climate strategy, and the GOP lacks the
votes to override a presidential veto.
36
Safety
Human Factors
IT/OT
Reliability
Markets
Competition
Cycling
Resiliency
Complexity
Risk Management
IT/OTSafety
Competition
Safety
Business Models
Cybersecurity
Scheduling Outages
Natural Gas Prices
Offset Loss of Supply
The Obama administration's
regulations have already begun to drive a recomposition
of the country's generation mix
as states and utilities prepare for the CPP deadlines,
but the removal of coal-fired power supply
has not increased prices, as many feared;
rather, the decline of natural gas prices has
dragged electricity markets to historic lows.
Nowhere has this been truer than the NorthSafety
Reliability
Cybersecurity
Competition
Markets
Scheduling
Outages
Customer Choice
Pace Of Change
Equipment Monitoring Risk Management
Safety
Competition
Grid Parity
Cycling
ing agency downgraded further into speculative
status this year, citing low power prices.
Exelon, which owns the nation's largest
nuclear fleet, has lost almost a quarter of its
market capitalization this year. With less than
half of 2017 generation hedged as of the end of
the third quarter, earnings expectations have declined
with the drop in forward power prices.
In some cases, low power prices have even
east. In the past two years, the region has had
over 16 GW of generation retire, which is
more than half of total U.S. retirements. Over
two-thirds of that lost capacity was coal-fired.
Meanwhile, only 4.3 GW of new capacity
went online, most of which was natural gas-
fired. Rather than power prices rising-as the
net capacity loss might suggest-the combination
of natural gas' price decline and the
increasing share of that fuel in the generation
stack contributed to a collapse in prices.
Year-to-date average on-peak, day-ahead
locational marginal pricing in the region's
three independent system operators-PJM,
ISO New England, and NYISO-was down
over 30% from the same period last year
through mid-November. That trend continued
in November with PJM Eastern Hub onpeak,
for instance, down 46% month to date.
Low Prices Weigh on Merchant
Profitability
Low natural gas prices are softening the impact
of coal retirements for electricity consumers,
but merchant generators leveraged to
wholesale markets are struggling to maintain
earnings and cash flow as hedges roll off.
Standard & Poor's expected wholesale
power margins to bottom in 2014 but has indicated
profitability will fall further in 2015
as low gas prices and energy efficiency gains
continue to curb power prices. NRG subsidiary
GenOn and Talen Energy Supply are
among the merchant generators that the ratwww.powermag.com
prompted
the arguably premature retirement of
significant former-baseload generation. In late
2015, Entergy announced the impending retirement
of the 728-MW Pilgrim nuclear plant in
Plymouth, Mass., and the 838-MW Fitzpatrick
facility in upstate New York because of mounting
losses from operating the facilities.
Gas, Renewables Surpass Coal
These retirements are yet another factor that
will drive up natural gas's share of the generation
stack. In 2010, the U.S. generated just
23% of its power with natural gas. In 2015,
that number could end up above one-third.
State renewables plans and tax credits have
driven more wind and solar projects. The former
will supply about 4% of the nation's power
in 2015, up from 2% in 2010, and will continue
to grow as about 3 GW of projects under construction
come online over the next two years.
Coal's share of generation is down to 34%
from 45% in 2010. Retirements have been
a factor, but so has the 13 percentage point
drop in capacity factors for the U.S. coal fleet
over the last six years. Whether utilization of
the remaining coal fleet ramps back up will
largely be a function of natural gas prices.
Record levels of that fuel in storage will cap
prices near term, but a longer-term recovery
to $3/MMBtu or higher would cause power
supply to shift back to coal. ■
-Jasmin Melvin, Jonathan Nelson, George
McGuirk, and Jeff Ryser are members of the
North American Gas & Power Group at Platts.
POWER | January 2016
Storage
Markets
ability
n Factors
ing Risk Management
Storage
T/OT
Markets
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Risk Management Regulations
Business Models
Grid Parity
a AnalyticsRegulations
Next-gen Staff
Distributed Generation
Storage
Human Factors Regulations
Policy
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Policy
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POWER January 2016

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