Last week, eyebrows were raised across the industry as First Energy’s competitive non-regulated generation unit filed bankruptcy sighting cost pressures and now is seeking government support for its nuclear and coal units. This move by First Energy opens the door for the closure of two coal plants and three nuclear power plants (located in PJM) with capacity of over 4,000 MW. More tough news for coal power generation after successive years where U.S. load has remained relatively flat, meanwhile generation market share gains by natural gas and renewables have come at the expense of coal. In addition, nuclear recommissionings are not going smoothly in the U.S. in recent years resulting in several planned nuclear plant closures. With more coal retirements expected in 2018, is the First Energy news a harbinger of a continued long slow decline of nuke and coal power generation?
In this Energy Market Commentary we will look at a scenario where we cut nuclear and coal generation in half from current levels and assume the generation gains are split between gas and renewables (here defined as just wind and solar). If in fact coal and nuclear continue to struggle to compete, more generation declines can be expected and this scenario is worth examining. How much increased gas demand does this scenario potentially create as upside for natural gas producers looking for growing demand? Which regions have the largest amount of nuclear and coal generation?
As shown in the slide above, the Midwest and Appalachia still represent the largest markets for coal and nuclear generation. While coal generation in these two markets has seen declines since 2011 thanks to proximity to low cost Marcellus natural gas, nuclear generation has remained relatively flat. If we convert all of the coal and nuclear generation in the Midwest and Appalachia to a hypothetical gas equivalence assuming a 7.0 MMBTU/MWh heat rate for gas plants, this represents over 16 Bcf/d of potential demand. This robust coal and nuclear output is on display in the PJM Interconnect on any given day as generation is split pretty evenly between gas, nuclear and coal as shown in the pie chart in the market operations summary page on the PJM website. E&Ps hungry to find new markets for their low cost natural gas may need to look at coal and nuclear generation struggles as a market opportunity.
As shown in the slide above, this scenario of cutting coal and nuclear generation in half could represent an incremental 9.6 Bcf/d of demand growth for the gas market by 2030. To put that in perspective that is the same size as the current build out of the six operating, permitted and/or under construction LNG export terminals in the U.S. (Sabine Pass, Cover Point, Elba, Cameron, Freeport and Corpus Christi). Unfortunately, due to the competitiveness of renewables, we cannot assume natural gas captures all generation declines, so in this case we used a 50/50 split. This is a back of the envelope estimate driven by impressive cost and output gains by wind and solar recently and an assumption those gains carry into the future.
Coal and nuke plants face a mean combination of price competition from shale gas and renewables compounded by unfavorable political and consumer sentiment in some markets due to environmental concerns. Should these trends continue, this hypothetical scenario may track towards a future reality. To track BTU Analytics’ power generation analysis, request more information about the Henry Hub Outlook.