Gas, wind set to dethrone King Coal in Midwest
By Leticia Vasquez and Darren Stetzel in Houston
July 16, 2013 - King Coal's reign in the Midwest is likely to end in the next five years as aging units, stricter environmental regulations and cheap natural gas supplies have paved the way for a dramatic change in the region's generation landscape, a Platts analysis shows.
Some 62 generating units producing more than 6,400 MW of power in the Midcontinent Independent System Operator territory are expected to be retired between now and 2018.
Coal — which currently makes up between 50% and 60% of MISO's total generation mix, according to the Energy Information Administration —constitutes the lion's share of that retiring generation, with 32 bituminous coal units and 17 sub-bituminous coal units set to go away. The rest are fuel oil plants.
Meanwhile, some 15 gas-fired generation units are being proposed in MISO between now and 2018.
Analysis continues below...
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That trend is occurring even as prices for Powder River Basin coal hold the advantage over gas at the electricity benchmark Indiana Hub for the next few years: as much as $4.86/MWh below gas in 2014, $5.03/MWh in 2015 and $5.11/MWh in 2016, according to Platts forward price assessments.
"Relative to other regions, MISO is still heavily reliant on coal," said Seth Schwartz, president of Energy Ventures Analysis. "But environmental issues and low natural gas prices are pretty big hurdles right now, and I don't see any new coal builds occurring in MISO or anywhere else."
Meanwhile, coal faces competition from renewable forms of energy as well. Wind accounts for about 50% of the new generation capacity being proposed in MISO, with 41 plants slated to go online between now and 2018, according to Platts data.
MISO approved $5.2 billion in transmission to deliver 21,000 MW of wind across its footprint by 2021. "The total MISO renewable portfolio standard is 25,000 MW by 2025," said Dale Osborn, consulting adviser for policy and economic studies at MISO.
But there are hurdles. "Investment in wind is driven by production tax credits, so that's why you're seeing the build-out for wind," Schwartz said. "If the PTCs were to expire at year's end, you'd see a virtual halt in new wind turbines."
Schwartz also cautioned that despite MISO's substantial reserve margin — pegged by the grid operator at 28.1% for this summer — market participants could have a false sense of security as more generators are opting to connect to PJM, which has a capacity market structure in place and thus provides more economic benefit.
"I think MISO has been living off its excess capacity. It's been more than adequate," Schwartz said. "But as it depletes because of retiring coal units and more units syncing up to PJM, I think the flaws in MISO's market structure will become more apparent, and they will move to a capacity market."
Schwartz said he expects that switch to occur in the next five years as discussions at MISO are already taking place.
Schwartz said project financing for new generation facilities can also be difficult, particularly for smaller shops with smaller balance sheets. "Most of those plants do not have any long-term sales or customers," he said.
Furthermore, wind project developers have to consider the geographic area of where they want to build and whether that area is already saturated with infrastructure.
Dominion, for one, has canceled its plans to build the 300-MW Prairie Fork wind farm in central Illinois as the abundance of existing supplies did not necessitate building new facilities, the company said. The plant was scheduled to go online in 2015.
"Ceasing this merchant development is aligned with our strategy to invest primarily in our regulated electric and natural gas businesses," said Dominion's Jim Norvelle, director of media relations. "Additionally, at this time, we do not believe the current or near-term renewable energy markets in this region support the construction of this wind farm. The renewable power markets in this region, and specifically the Illinois wind market, have abundant existing generation facilities that have already been built and are in operation."
Still, more than 600 MW of wind power is queued up to go into service before the end of 2013, including one of NextEra's Pheasant Run units.
Steve Stengel, a spokesman for NextEra, said the start-up of the first unit is on track to become operational by the end of this year, and the other in the first quarter of 2014. The output for both units has been sold under a long-term power purchase agreement, Stengel said.
Development Partners Group's $700 million St. Joseph County Energy Center in Indiana is expected to go online in the 2016-2017 timeframe. The two-phase project will include two 670-MW units, one serving MISO and the other serving PJM.
The St. Joseph facility is similar to two other proposed projects that never came to fruition. But Willard Ladd, president of DPG, said the St. Joseph facility has been well-received by the community and utilities, and he is optimistic that it will move forward.
"One of the unique aspects of the St. Joseph facility is that it sits only eight miles from the Nipsco LNG facility," Ladd said. "These are things we watch as a developer as these are long-term assets we're building. Having storage right there makes us unique and well-positioned when gas supplies become an issue."
Need for diversification given low gas cost
Ladd also said people see the need to diversify given the low cost of gas and the rising price tag of getting existing coal plants up to standard.
An analysis by MISO shows that around 86% of the coal fleet will require action to comply with the proposed regulations, as some generators are retired and others retrofitted with additional environmental controls.
"Those trends are continuing," Ladd said. "Given what's going on with the price of gas, there is a strong interest in diversification."
Ladd pointed to the announcement last week by FirstEnergy that it would shutter this fall two coal plants in Pennsylvania, wiping out more than 2,000 MW of baseload capacity there and making the company's generation fleet close to 100% non- or low-emitting.
The move may have other companies considering whether investing the money to upgrade existing coal units is worth it given the low cost of gas, Ladd said.
"Will it all tilt toward gas? No one really knows, but it's not just [Environmental Protection Agency] regulations, but the competitiveness of gas that's working its way through the system," he said. "We're getting to that juncture where we say it just doesn't make sense anymore."
Last week, American Electric Power said it would retire its 585-MW Muskingum River coal unit 5 in Beverly, Ohio, sometime in 2015.
Minnesota Power is yet another company "moving to balance its generation mix, by supplementing coal with more wind, hydro and gas," according to Allan S. Rudeck Jr., the firm's vice president of strategy and planning.
"We’ve been on this path for a while — we’ve moved from an energy supply that was 5% renewables in 2005 to one that is 20% renewables today," Rudeck said. "By the end of the next decade, Minnesota Power’s vision is to have an energy mix of one-third renewable, one-third coal and one-third natural gas and other."
When it comes to adding renewables to its portfolio, Rudeck said they will likely come in the form of additional hydro and wind resources as the MISO footprint is wind-rich to the west and hydro-strong to the north.
"These two renewable resources are complementary and will serve our customers well in aggregate," he said.
The extension of the federal tax credit means that Minnesota Power is also strongly considering adding another 100 to 200 MW of wind to be installed in the next two or three years.
Meanwhile, a host of other gas projects altogether totaling more than 6,000 MW are working their way through development in preparation for service in the next five years, including an expansion of the Midland Cogeneration Venture in Michigan being developed by Borealis Infrastructure.
At 1,633 MW, the Midland project the largest gas-fired, combined-cycle cogeneration unit in the US. Borealis is seeking to add another 640 MW to the plant by 2015.
Market players confident existing gas pipeline can handle growth
With new large-scale projects leaning heavily toward gas, market players and other industry executives are confident that the existing gas pipeline in the country's midsection will be able to handle the growth.
In fact, some areas of the MISO footprint could be said to have too much gas pipeline capacity.
"Chicago has been known as the sewer of the natural gas industry as they have way too much capacity," said EVA principal Steve Thumb, noting all the supplies coming in from Canada, the Gulf Coast and other areas. "Can you get into areas where you'll have to build laterals? Yes, you can have local problems, but you don't have general problems with gas infrastructure."
Ladd agreed. While there are areas where bottlenecks occur from time to time, he thinks the gas pipeline infrastructure in place in the Midwest is sufficient to meet both current and projected demand.
One project expected to go online in the near future is Alliance Pipeline's Tioga later expansion in North Dakota, where tie-in work began last week, according to Bentek. The work originally was scheduled to end June 29, and the lateral was expected to be in service July 1. But Alliance has not posted any new meters or flows, Bentek said.
The Tioga lateral expansion is a 106,000 Mcf/d pipe that will transport gas from the Williston Basin to the Chicago area. Currently, there is 61,500 Mcf/d of firm capacity subscribed on the expansion, held by Hess.
As for the electric grid, MISO remains confident in its ability to meet the changing needs of its territory, though it does concede it will require additional investment.
"Without new infrastructure investment, energy demand will overtake supply, causing wholesale costs to rise higher than they otherwise would and potentially resulting in energy shortages," the grid operator said in its most recent Strategic Plan, which covers the 2012-2016 period.
Minnesota Power's Rudeck agreed. "Investment in the transmission system is key to ensuring the reliability of the grid going forward. It is the companies' and grid owner's responsibility to work together and find a solution for the new capacity."
Next chart: Power generation mix in MISO