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Gas' role in Texas generation mix to grow despite coal price advantage

June 12, 2013 - Texas, a state where natural gas has made up the largest portion of the energy mix in all but one year since 2004, will likely continue to see the fuel's share of its power generation mix grow thanks to abundant supplies and relatively low prices.

Additionally, the state's market design, renwables push and ample infrastructure could trump the price advantage cheap coal has for the forseeable future, a Platts analysis shows. .

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Some 60 generating units representing nearly 16,000 MW of capacity are being proposed in Texas, according to Platts data. Gas accounts for more than 80% of the proposed generation. "From a planning perspective, ERCOT is a good region for new generation," said Electric Reliability Counil of Texas' Warren Lasher, director of system planning. "It's a market in which new participants can come in and compete with existing technologies. It provides a level playing field."

ERCOT operates an energy-only market structure in which generators are paid only for the power they produce, not the capacity they hold. ERCOT is the grid operator for 85% of the state's electric load.

And when it comes to fueling the new generation planned for the region, Texas should have no problem getting gas to the potential 42 new units that would need it. With 45,000 miles of intrastate gas pipelines traversing the state, Texas has more than enough pipeline capacity to transmit gas supplies where required, according to BNP Paribas' director of commodity research Teri Viswanath.

"So much gas is coming out of Marcellus and Utica that it is now the main source of supply for the Northeast markets, and this would free up the Texas pipelines that were previously transmitting gas from Texas to the Northeast," namely Tennessee Gas Pipeline, Texas Eastern Transmission and Transcontinental Gas Pipe Line, Viswanath said.

Part of the proposed gas generation will replace some 818 MW of generation lost from gas plants that are set to retire between now and 2017, Platts data shows. But the bulk of proposed new generation will help feed the growing demand in the state.

Texas is the top consuming state for gas in the US, with 4.21 Bcf/d consumed in 2012, up from just 3.82 Bcf/d in 2004, according to data from BNP Paribas. Florida was the second-largest consumer in 2012, at 3.11 Bcf/d.

When it comes to power generation, gas accounted for nearly 45% of total power generated in ERCOT in 2012, representing 4.2 Bcf/d. That is up from an annual average of about 3.9 Bcf/d between 2007 and 2011, according to Platts unit Bentek Energy.

And with electric demand in Texas expected to grow by about 11.4% from 2013 to 2017, demand for gas will also rise. Bentek projects gas demand in the state to grow by 1.7 Bcf/d over the next five years.

"Natural gas supplies in Texas are abundant, and this is reflected in the fuel mix being used to serve consumer needs," ERCOT spokeswoman Robbie Searcy said.

That is not to say coal and other resources will not have a hand in meeting the needs of electric customers in the state.

Coal — specifically, Powder River Basin and Texas lignite coal — with roughly 20 plants spread across the state, accounted for about 34% of the total power generated in ERCOT in 2012, representing the second-largest fuel source in the region that year and for much of the last decade. Only in 2006 did coal surpass gas in terms of market share in ERCOT's power generation.

Coal's market share, at least in the next few years, is not likely to change much.

This spring, LS Power brought online its 925-MW Sandy Creek coal unit after a more than year-long delay after damage to the plant's boiler occurred during testing in late 2011.

Meanwhile, two coal plants — CPS Energy's Deely units 1 and 2 — are set to be retired by the end of 2018, according to company officials. But the company's 2012 purchase of the 800-MW Rio Nogales gas plant near Seguin will replace much of the generation lost from the Deely units, which total about 870 MW, CPS Energy spokesman John Moreno said.

"We're always looking forward when it comes to generation," Moreno said, adding the company is working toward a goal of generating 65% of its power from low or no-carbon emitting resource by 2020. Another coal plant — AEP's Welsh unit 2 — is expected to be retired in 2014. The plant, located in the Southwest Power Pool footprint of Texas, is part of a strategic plan by AEP to retire between 5,000 MW and 6,000

MW of coal-fired generation across nine states between now and mid-2015, according to spokeswoman Melissa McHenry.

AEP opted to retire Welsh unit 2 in response to new Environmental Protection Agency emission limits, rather than install additional emission control equipment. The company, however, is installing emission control equipment on the other two generating units at Welsh, and they will continue operating, McHenry said.

"The coal fleet in ERCOT, in general, is newer, larger and better controlled than the coal fleet in the rest of the US," Lasher said, noting the average age of existing coal plants in ERCOT is 30 years or lower. "In general, most have scrubbers, electrostatic precipitators, so there is no need for significant capital improvements needed to comply with EPA regulations."

A look at Platts forward basis assessments reiterates coal's role in power generation going forward. Coal's price advantage over gas amounts to $11.79/MWh for calendar year 2014, shrinks to roughly $11.55/MWh by 2015 and then rebounds to about $11.61/MWh by calendar year 2016.

Meanwhile, wind, which was a little more than 9% of the total power generated in ERCOT last year and hit a new winter peak of 9,481 MW in February, is also expected to contribute to the growing electric needs in the state.

ERCOT has nearly 1,200 MW of wind power in its generation queue through 2017, the operator's data shows. Texas already holds the record for most wind capacity across the US.

ERCOT's Competitive Renewable Energy Zone transmission projects, a program designed to eventually deliver about 18,000 MW of wind energy from West Texas wind farms to load zones in the eastern half of the state, have sparked another push by wind developers to build new generation.

"The big impact of CREZ so far is that several of those lines go into the Panhandle, an area that has not had access to the ERCOT market before," said Lasher, noting some of the best wind generation resources are located in that part of the state.

Renewable portfolio standards in Texas required 10,000 MW of renewable resources to be installed in the state by 2025. ERCOT's total installed wind capacity hit that mark in September 2012.

"The gas generation and wind generation that we see in the queue will work together," Lasher said. "Gas is flexible. Wind is variable."

Next page: Texas power grid ready for growth

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