Utilities weigh conversions to natural gas

Sponsored by

by Andy Patterson and Eric Chung, Ernst & Young

Given looming Environmental Protection Agency mandates, which coal-fired generating units should be shut down early? Does it make financial sense to install environmental and other retrofits on the facilities and keep them running? Should coal plants be converted to natural gas? When are supercritical coal plants no longer sustainable in competitive generation markets?

A few years ago, such questions were nearly unthinkable. Coal--cheap, abundant and homegrown--has been the U.S. power industry's go-to fuel. Nuclear, natural gas, solar and wind generally were too expensive or too impractical to compete with coal. As utilities consider adjusting their generation mix, they should understand and evaluate their options and analyze multiple scenarios.

Rising Coal Costs

Coal supplies nearly half of U.S. electric power generation needs, but factors--most notably the rise of shale gas and abundant natural gas supply--are testing coal's supremacy as the most cost-effective energy source and driving interest in coal-to-gas conversions. First, the cost of mining coal is increasing. The richest, most accessible deposits are nearing depletion, forcing mining companies to dig deeper to access thinner seams. Add in transportation, and the all-in price per ton of bituminous coal has more than doubled during the past decade. These trends are exacerbated by a growing global market for coal and periodic incursions--especially into the Appalachian coals--by European interests. The regulatory landscape suggests further increases in the cost of operating coal plants. New federal regulations designed to limit power plant emissions will continue to require expensive upgrades to keep the oldest, least-efficient subcritical coal plants running. Meanwhile, a primary objective of many state and regional regulatory activities remains to reflect the price of carbon emissions in the cost of coal-fired generation. Most important, new shale gas drilling techniques have unlocked vast reserves in shale rock formations. The price of cleaner-burning natural gas is consistently competitive with coal and often cheaper as a generation fuel source.

Some 175 coal-fired units are expected to retire by 2016, pulling 27 GW of capacity offline, according to the U.S. Energy Information Administration. That compares to 6.5 GW retired during the previous five years. Only 10 of the plants to close are being considered for natural gas conversions. But interest in coal-to-gas conversions is rising. Regulated utilities are obligated to provide cost-effective, reliable electricity while limiting environmental impact. Because converting a coal-fired plant to burn natural gas costs far less than building a new gas-fired plant, coal-to-gas conversions can be the smartest solution. For some utilities, building a new gas plant is the right path. For others, the opportunity to leverage extant water rights, transmission access, staff and other resources makes the conversion highly compelling from a cost standpoint.

Factors to Consider

As utilities consider adding more natural gas to their generation mix, they must:

  • Understand the options. Factors include technical viability of conversion, market uncertainty, changes in regulations, ready availability of natural gas pipeline capacity and the ability to convert existing equipment.
  • Evaluate each option. This ideally would include the development of a driver-based decision model to calculate a plant's gross margin from which it can calculate the net present value of free cash flow and estimate the generation asset value under each option. Utilities also should analyze these critical assets at a portfolio level with the objective of optimizing capital spend across the fleet and not simply asset by asset.
  • Introduce innovative partnering concepts. Component manufacturers, joint development partners, local communities interested in jobs and tax incentives, natural gas pipeline owners and other parties have a vested interest in a natural gas build out. Innovative partnering concepts are a key option for making average projects look extremely lucrative.
  • Conduct scenario-based planning. Sensitivity testing, plus Monte Carlo simulation, scenario analysis or both might help utilities understand how factors such as market or regulatory forces might affect each option. Utilities would be able to leverage a risk-informed perspective in comparing the value associated with coal-to-gas conversion with that associated with early retirement or retrofit for emission controls. This effort would need to pay close attention to natural gas and coal forward price curves.

There is no better time to consider converting aging coal-fired plants to gas. Utilities that seek to maximize value for ratepayers, shareholders and their organizations should adopt a robust, well-structured, risk-informed decision-making process to determine whether coal-to-gas conversion is a viable alternative.

Authors

Andy Patterson is a principal in the power and utilities advisory practice of Ernst & Young.

Eric Chung is a senior manager in the power and utilities advisory practice of Ernst & Young.

The views expressed by the authors do not necessarily reflect the views of Ernst & Young LLP, a client-serving member firm of Ernst & Young Global Limited operating in the U.S.

More Electric Light & Power Current Issue Articles
More Electric Light & Power Archives Issue Articles

Sponsored by

WEBCASTS

Understanding Moisture Dynamics in Power Transformers

While the need to measure moisture in power transformers has been well documented and is universa...

Regional Market Outlook for the WECC and ERCOT

Looking for an independent market outlook and analysis of the WECC and ERCOT power markets? ...

Streamline Utility Field Inspections to Improve System Reliability &  Customer Satisfaction

Arm your workers with solutions that improve productivity and customer satisfaction. Listen in an...

Customers first: how utilities are using customer engagement to conquer new business challenges

Join ELP for a moderated discussion with Opower and Chartwell Research around customer engagement...

EL&P BUYER'S GUIDE PRODUCTS

MITEM Corp

Provides CRM solutions for regulated U.S. public utilities. The product, MitemView integrates differently designed systems to share critical data a...

Resources on Demand

Manages resource requests, tracks personnel movements, and supports lodging/logistics during a power restoration event.

Smart Grids

Quanta is contributing to its customers' smart grid initiatives by installing technology on power networks to provide energy management solutions f...

Horizontal Directional Drilling

With 28 small, mid-sized and large drilling rigs, Quanta Pipeline Services is one of the largest horizontal directional contractors in the world fo...

POWERGRID BUYER"S GUIDE PRODUCTS

EtherMate® Industrial Ethernet - IO Modules

LioN-M ProfiNet device with 16 digital I/O channels, channels can be used universally as inputs or outputs, M12 socket, rotary address switches for...

Low-Smoke Zero Halogen Premise Distribution Cable

AFL’s Low-Smoke Zero Halogen (LSZH) distribution cable offers all of the benefits of a traditional 900 µm based optical cable while supporting comp...

OFL280 FlexTester - Handheld OTDR

AFL's OFL280 FlexTester offers an unmatched combination of fiber test functions, ease-of-use, portability, and value.

TRM® 2.0 - Test Results Manager PC Analysis and Reporting

Test Results Manager 2.0 (TRM® 2.0) is an all-in-one analysis, viewer and reporting tool designed for use with NOYES fiber and inspection products.

FEATURED ENERGY JOBS

View more Job Listings >>

POWERGRID International

April 2014
Volume 19, Issue 4
1404pg-cover

ELECTRIC LIGHT & POWER

January 2014
Volume 92, Issue 1
cover