Energy Evolution: July 18, 2005
Residential, Commercial Needs May Spur Gas Use
Over the next five to six years natural gas demand in the North American market could well be driven higher by the thirst for power in the residential and commercial sectors, spurred by economic growth in Canada and the United States.
“Demand in the power market is really driven by the commercial and residential sectors” as these consumers respond to improved economic conditions, said Cameron Gingrich, lead analyst for a Ziff Energy Group study.
Despite some continued erosion of industrial demand for the fuel, due to high prices, the pull on gas supplies for electricity should still account for 70% of all power market growth in North America by 2012, according to Ziff.
Gas-fired generation will continue as the preferred short-term option in meeting electricity requirements and may account for 40% to 45% of power load in North America by 2012 versus about 25% currently, said Gingrich.
“We [Ziff] like coal and nuclear” as power generation sources, but he said the timeline of five to 10 years in getting approval for and building these facilities gives gas-fired plants an advantage in the near term.
Various industry studies have shown gas-fired facilities can be brought into production in two to three years and can ramp up output quickly as required during peak power demand periods.
While Gingrich said construction of some coal and nuclear facilities will proceed over the next several years, the many idled gas-fired units that have already been built are likely to be the go-to power sources as distributors struggle to provide a reliable electricity supply.
In fact, recent reports by the Energy Information Administration (EIA), the North American Electric Reliability Council (NERC) and Fitch Ratings Inc. in the U.S. provide evidence that many of the facilities -- that have added 200 000 megawatts of power between 2000 and 2004, particularly in some regional markets -- are sitting idle for 75% to 80% of the year.
“The projected 1.8% to two per cent per annum growth in power consumption in the coming six years will occasionally lead to greater usage of natural gas fuel, since gas-fired power plants make up the bulk of the unused capacity,” said Ellen Lapson, a power sector analyst at Fitch. The ratings agency previously projected hourly use of combined-cycle, gas-turbine generators in some areas, such as the U.S. Southeast and Midwest, could more than double to 40% or 45% per year in 2010 from 20% or less in 2004.
Similarly, in this year’s long-term outlook to 2025, the EIA estimated 281 megawatts of new capacity would be needed by the end of that period and 60%-plus would likely be gas-fired, combined-cycle, combustion-turbine or distributed-generation facilities, with over 80% of capability additions needed after 2010, when the current excess of generating units has been reduced.
Every seasonal assessment of electric system reliability by NERC has included references to idled generation being a factor in determining resource adequacy.
Gingrich and Dennis Elias, manager of gas consulting at Ziff, noted some areas of the U.S. that have power generating facilities with dual-fuel capability are turning away from using fuel oil as crude petroleum prices hover around the $60 (US) per bbl range. Areas, such as the U.S. Northeast, where they have that fuel-switching capability are opting for gas-fired power and will probably continue to do so as long as cost savings are provided.
The Ziff study found that 70% of power generated in North America in 2004 used generation sources that have lower marginal costs than gas. Most of this was coal, which is heavily used in the U.S. and several provinces in Canada. This allowed industrial power users to access a commodity price that is diversified and lower on average.
According to the Ziff study, the North American market used 68 bcf of gas in 2004, 15 bcf a day or 23% of which went to gas-fired power plants.
The four big sources for North American power generation in 2004 identified by Ziff were: coal, 47%; nuclear 19%; gas, 16%; hydroelectricity, 13%; and minor amounts sourced from oil, wind, wood and other sources.
Gingrich indicated the trend for high gas prices to reduce industrial demand for that fuel will likely continue. Meanwhile, commercial and residential users also should continue to drive power demand growth, which they have done at the rate of one per cent a year since 1991, Gingrich said.
He said the inelastic core market share in North America is 36% for gas and 63% for power.
Reacting to economic reports by RBC Financial Group and BMO Financial Group that indicated energy costs are prohibiting gross domestic product (GDP) growth for some regions, such as Ontario, Gingrich and Elias noted that power prices represent “only about 10%” of the expenses for many of the manufacturing industries. “These costs can easily be passed onto the consumer,” Gingrich said.
Energy costs that provide a much larger share of the operating expenses for industries, such as petrochemical producers, would be much harder to recoup through product pricing, he said.
The RBC and BMO economic reports on provincial GDP growth indicated Ontario could be affected by high energy costs this year, but both noted the province would see enough economic gains to overcome these costs in subsequent years, particularly if energy prices retreat, as they anticipate.