Tuesday, March 19, 2019

SPP Looking Forward Report: The Shale Revolution Continues

By Tom Kleckner

The shale gas revolution that has undercut the economics of coal and nuclear plants doesn’t appear to be ending anytime soon.

Economists Craig Roach and Vincent Musco say the revolution will continue, despite evidence that “there is a limit to how low natural gas prices can go and for how long low prices can persist.”

In producing their seventh annual looking-forward report for SPP’s Board of Directors, Bates White Economic Consulting’s Roach and Musco say low gas prices will continue “if and only if” technological improvements continue to delay the search for more hard-to-find gas reserves.

natural gas-fired combined cycle generation

Bates White’s Vincent Musco (l), Craig Roach explain their report to Oklahoma Commissioner Dana Murphy and SPP’s board and members. | © RTO Insider

Two Risks

Roach said they see two risks to the continued shale gas revolution: underground and aboveground risk.

“The underground risk is whether the technology for shale gas production will continue to improve, so that even as the U.S. turns to more difficult reserves, the price will continue to fall,” Roach said in a presentation to the Board of Directors/Members Committee meeting last month. “That is happening. All new wells drilled last year are producing more gas on average than the wells drilled in previous years.”

In the report, Roach and Musco note “proven reserves reflect not only the physical abundance of natural gas reserves but also estimates of whether those reserves can be produced at prevailing market prices.”

The economists say data indicate a floor of roughly $3/MMBtu, based on a recent 16.6% decline in proven reserves. According to the U.S. Energy Information Administration, Henry Hub spot prices fell 42.4% in 2015, from $4.37/MMBtu to $2.62/MMBtu, and the agency predicted a further 6.1% decline in 2016. April’s spot prices were $3.10/MMBtu, up from $2.88/MMBtu the month before.

“The bet is that big-data analytics of the massive amount of data captured on actual gas and oil wells will be what sustains the technologic improvement needed to keep prices moderate,” Roach and Musco write.

Six states in SPP’s footprint — Arkansas, Kansas, North Dakota, New Mexico, Oklahoma and Texas — account for 46% of the country’s total natural gas proved reserves.

Low gas prices have led to an increased investment in combined cycle resources, which, along with subsidized renewable generation and flattened energy demand, has led to low market prices and the early retirement of baseload plants, the report says.

Concerns over Nuclear Generation’s Viability

“You have people saying this is the markets working. You also have people saying this isn’t the markets working, because prices are artificially low,” Musco said. “The markets aren’t capturing the full value of nuclear generation. They’re not capturing the full reliability value and the zero-emissions value of nuclear generation.”

natural gas-fired combined cycle generation spp

| U.S. Department of Energy Quadrennial Energy Review; Bates White Economic Consulting

The report notes that reductions in nuclear capacity could increase carbon emissions, citing EIA data that 28% of all U.S. nuclear generation has recently retired or is at risk of retirement by 2030.

Nuclear generation has provided about 20% of the country’s energy each year and accounts for 60% of zero-emissions generation in the U.S. “Developers are turning almost exclusively to natural gas-fired combined cycle generation to replace retiring baseload capacity,” the report says, noting 100 GW of natural gas-fired combined cycle generation is under development. “However, it may also be argued that these retirements are part of the natural course of generation investments. As plants age, uneconomic plants give way for new, more efficient generation to take their place.”

That has already happened within SPP’s footprint. Last October, the Omaha Public Power District retired its 500-MW Fort Calhoun nuclear plant, saying it would save up to $994 million over the next 20 years. OPPD’s board blamed the retirement on low gas prices and load growth, among other factors. The plant’s operating license was good until 2033.

Fort Calhoun’s retirement leaves SPP with only two nuclear plants contributing to its generation mix: Nebraska Public Power District’s Cooper Nuclear Station (771.5 MW) and Kansas’ Wolf Creek (1,205 MW), which is owned by three separate companies.

Moody’s has reported that both plants “could face a ‘similar fate’” because they produce power at a cost that is often higher than SPP’s north pricing hub.

But Roach and Musco say they believe the plants won’t retire early, noting that Cooper and Wolf Creek have lower operations and maintenance costs than the smaller Fort Calhoun, their ownership has less available capacity to offset their loss and NPPD CEO Pat Pope expects a “‘capacity-short environment’ in SPP,” making the nuclear units a “good long-term strategy.”

The report notes efforts to address the problem through out-of-market payments in New York and Illinois, FERC’s Notice of Proposed Rulemaking on fast-start pricing, small modular reactors and other technological improvements.

It also warns of legal challenges to states considering “special action to ‘save’” baseload generation; the “direct impact” to SPP’s markets if FERC changes the way wholesale market prices are calculated and the threat posted to baseload generation as existing power purchase agreements expire.

Other Issues to Watch

The report also evaluates five other market and regulatory issues that could affect SPP’s markets or require the board’s special attention:

  • The changing utility model in the face of distributed energy resources and decentralization.
  • The U.S. Supreme Court’s ruling in cases involving PJM stakeholders and the states of New Jersey and Maryland, which held that the Federal Power Act “‘provides FERC with the authority to regulate wholesale market operators’ compensation of demand response bids,’” and other jurisdictional issues.
  • Lessons from the 2016 Electricity Policy Modernization Act, which died because of unresolved differences between the House and Senate versions but nonetheless raised legislative concerns over the “catastrophic consequences of long-term power outages.” Future legislation could include provisions on grid hardening and security and provisions related to markets and distributed energy resources, the report says.
  • The outcome of the Trump administration’s plan to undo the Obama administration’s Clean Power Plan. Because the Supreme Court has already ruled that EPA has the authority under the Clean Air Act to regulate carbon emissions, some observers say Trump can’t repeal the CPP without providing a replacement, such as a carbon tax.
  • Electric vehicles. Although EVs have not gained significant market share to date, the authors say the SHEAM model — shared, electric, autonomous mobility — can significantly reduce their payback period.

The report says while DER are not an “existential threat” to the grid, they are “likely to challenge generation-owning utilities in the production of electricity and could also emerge as alternatives to traditional grid investments.”

While the report was Roach and Musco’s seventh for SPP, it’s their first for Bates White Economic Consulting. The previous reports were done with Boston Pacific, which joined Bates White’s energy practice in November.