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PJM market incentives, reliability needs drive robust gas plant additions

  • Author Darren SweeneyAnna Duquiatan
  • Theme Energy

The amount of new gas-fired power plants planned in the PJM Interconnection market over the next five years outpaces additions of either solar and wind capacity, driven by market incentives and reliability needs that several analysts say remain very strong.

These dynamics have compelled power providers and generation asset owners operating in the region to build and buy more natural gas plants even as renewable projects ramp up.

Nearly 22,000 MW of natural gas capacity in PJM is planned from 2021 through 2026, according to an S&P Global Market Intelligence analysis. This compares to 14,384 MW of solar and 9,443 MW of wind generation expected to be added over the same time frame, the analysis shows. Also, 465 MW of storage is in the current pipeline through 2026.

Analysts contend heat waves in California, a grid-crippling freeze in Texas and outages in Louisiana underscore the need for baseload gas generation.

"[T]he generation that is being added is being done so mostly by private players seeking the highest revenues and [it is] not hard to look at [California] and Texas and see extreme power price spikes when wind and solar aren't available and that clearly means building natural gas plants," CreditSights analyst Andrew DeVries told S&P Global Market Intelligence.

The analyst noted that battery storage can help offset the need for gas generation, "but we really need a significant breakthrough on the battery [technology] front to stop the gas plants from being built."

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"I can't tell you what the right strategy is," Scotia Capital (USA) Inc. analyst Andrew Weisel said in a Sept. 14 phone interview. "You've got to consider the costs, the environment, the reliability, the politics, customer sentiment. All of those types of things are going to matter behind these decisions."

Weisel, however, said he does believe natural gas will be "part of the permanent solution."

"I don't think it's a mistake for companies to be building natural gas plants," Weisel said. "Over time, my expectation is that as more renewables are built, as more battery storage is built and ... future technologies like hydrogen become economic, gas plants will naturally run less."

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Fueling the future?

A recent S&P Global Platts Analytics analysis showed that natural gas accounted for a record 38% of total power generation in the U.S. in 2020, but by the early 2030s, the fuel's market share could fall below 30%.

In addition, fuel prices have been rising significantly as the economy rebounds from the coronavirus pandemic and supply tightens, prompting concerns that natural gas prices will continue in the $5/MMBtu range this winter, with the potential to hit $10/MMBtu.

At CreditSights, DeVries said the firm fully understands "the 'stranded gas plant' argument" but California and Texas have both shown that "as renewables lead to coal plant retirements, those peak days absolutely, positively need those gas plants," DeVries said. "We also understand utilities ... overstate load growth to justify spending hundreds of millions of dollars of ratepayer money on gas plants to earn an ROE on [the investments] for decades, but the flip side is nobody is ever going to accurately forecast customer load [10] years out. So, if you are going to be off, you better be off on the overestimation side, so the lights don't go out."

It is also possible that baseload capacity in PJM "could come under pressure" driven by changes in policies and economics, according to Steve Piper, director of energy research for S&P Global Market Intelligence.

"Pennsylvania's plan to enter [the Regional Greenhouse Gas Initiative] would pressure essentially all of the state's coal capacity to retire," Piper said. "And the high natural gas prices we're seeing today could undercut the economics of new gas baseload."

Despite some unfavorable macroeconomic trends, natural gas plants represent nine of the 10 largest planned capacity additions under development in PJM.

Curtis Wilkerson, president of Orion Strategies, said the 1,875-MW Guernsey Power Station in Ohio is "on track" for commercial operation in late 2022. Orion Strategies represents Caithness Energy LLC, a privately held company with a 50% ownership interest in the planned combined-cycle natural gas plant.

Apex Power Group Inc., which owns the remaining 50% interest and operates the Guernsey gas plant, could not be reached for comment.

The developer of the 940-MW Trumbull Energy Center in Ohio and several other privately held companies developing large gas plants in the PJM region did not respond to questions about their projects.

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No single solution

Meanwhile, the debate continues on what can help fuel the clean energy transition and preserve reliability in PJM.

"At the end of the day, it would be really easy to say if economics are all that matter, you choose this. If the environment is all that matters, you choose that. If reliability is all that matters, you choose this," Weisel said. "And hopefully, the technologies will evolve in the coming 10 to 20 [or] 30 years that you can have one answer that checks all of those boxes."

Exelon Corp. was successful in its push for Illinois to enact subsidies to preserve its nuclear plants based largely on fears of job retention, reliability concerns and meeting the state's emissions reduction goal.

"From an environmental standpoint, I think it's great that Illinois has decided to support those plants," Weisel said. "To ensure that we keep the lights on and keep emissions down, nukes have to be part of the story."

The analyst, however, noted that nuclear plants in general are "wildly uneconomic."

"The cost to operate is so expensive even though the marginal cost to generate power is so cheap," Weisel said.

Opportunities on the water

Utilities also are ramping up investments in offshore wind.

Dominion Energy Inc. subsidiary Dominion Energy Virginia, known legally as Virginia Electric and Power Co., in September 2019 announced plans to build the 2,640-MW Virginia Beach Offshore Wind Project in three phases of 880 MW each. If approved, the first phase of the $8 billion project would be completed in 2024, with the additional phases expected to come online in 2025 and 2026.

"It's not going to be a long-term challenge to build offshore wind," Weisel said.

The analyst noted that his past concerns revolved around the lack of infrastructure, skilled workforce and supply chain in place in the U.S.

"All of that is taking a lot longer than the industry leaders thought," Weisel said, adding there is "definite momentum" now driven by policies and support at the state and federal levels.

The analyst said that in the next five or 10 years, he expects "a lot of states to have a large amount of offshore wind in place."

"That doesn't mean it's going to compete with baseload gas economically," Weisel added. "The cost is likely going to be at a premium for quite a long time, in my view."

CreditSights has been skeptical of Dominion committing to such a large offshore wind project before its pilot project was even online. In addition, DeVries has pointed to ArcLight Capital Partners LLC's acquisition of PSEG Power LLC's non-nuclear generation fleet and NRG Energy Inc.'s oil and natural gas assets as evidence of the near-term importance of fossil assets.

"Look at ArcLight buying all those natural gas plants from NRG and PSEG Power in markets about to be saturated with offshore wind," DeVries said. "I bet those guys are looking at what's going on in Europe when the wind doesn't blow and just laughing all the way to the bank waiting for the same dynamic to come to the U.S."

For its part, PSEG Power's parent company, Public Service Enterprise Group Inc., is pivoting to cleaner generation, with Chairman, President and CEO Ralph Izzo telling investors the company sees a "sizable opportunity in offshore wind" and infrastructure in New Jersey.

"What we have been telling folks is that we expect it to be a nine-figure investment opportunity," Izzo said. "But I think we've understated it. Looking at the breadth of what New Jersey wants to see happen, we may need to add a zero to that."

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S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.

  • Author
  • Darren SweeneyAnna Duquiatan
  • Theme
  • Energy