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Where Has the Generation Load Gone?

March 11, 2016 | By Luke Larsen

If you have ever flown on a Southwest Airlines flight, chances are that you have heard the following announcement from a well-trained and witty flight attendant: “There are two smoking sections on this flight, one outside each wing exit. We do have a movie in the smoking section tonight, hold on, and let me check what it is ... Oh here it is, the movie tonight is 'Gone with the Wind.'” 

The half-hearted, flippant laughter that typically ensues from that punchline might also have been overheard when discussing the pace of natural gas power demand growth in certain regional natural gas trading communities. Market opportunities for gas-driven incremental power generation demand in the Midcontinent and Texas have been particularly lacking over the last couple of years, in part becuase wind power and other forms of renewable power generation capacity have been swamping the grid.

This week’s Get The Point, will take a look at this developing and ongoing situation. First, let’s get up to wind speed by calibrating our anemometers correctly so we can chart the affected generation load ahead.

In a report released by the Energy Information Administration (EIA) last week, the agency noted that the U.S. can expect additional wind projects for 2016 to be slightly smaller than the record 8.1 GW (gigawatts) of utility-scale generating capacity that came online  in 2015. Wind capacity additions in 2016 are expected to total 6.8 GW this year, with most of these new wind additions in the Plains region between the Dakotas and Minnesota, and south to Texas and eastern New Mexico.

The graph below depicts the total electric generation capacity from all sources expected to come online in 2016. We should note that the majority is, perhaps, optimistically scheduled for December start-up for licensing purposes (necessary for qualifications under the Renewable Electricity Production Tax Credit, or PTC, which requires that projects  must commence construction by Dec., 31 2016). Already this year, the Federal Energy Regulatory Commission (FERC) has documented that five new “units” of wind with 468 megawatts (MW) of capacity were brought into service.

EIA: Electric Generation Capacity Additions
Source: EIA

The Gas Industry’s Measurement of Volumetric Relevance of Wind Energy

Because wind does not consistently blow in any one location at any determined sped or frequency, actual wind power generation does not in any way, shape or form equal to the cumulative wind power generation capacity listed for these additional facilities. In other words, because of its lower capacity factor, additions in capacity listed in GW or MW will not equal actual generation in GW hours (GWH) or MW (MWH) over any certain time period.  

The chart below comes from the American Wind Energy Association (AWEA), and it depicts several items, but the important one as we move through the first quarter of 2016 would be the light blue bar that references cumulative wind generation capacity available in MWH on a per annum basis going back to 2001. Actual MWH generated over the course of 2015 only approached 70,000 MWH as we closed out 2015. 

The chart also references the new capacity installations for each specific year, broken down quarterly back through 2008. The significant decline which occurred in 2013 was the result of the aforementioned tax credit temporarily expiring at the end of 2012 before being re-enacted at a later date.     

 AWEA

Source: AWEA.org

 The next couple of charts shows this same capacity data through today and further echoes the tremendous buildout we have witnessed this past decade. Ironically, at the same time as the Shale Revolution occurred, the wind generation industry was enjoying its own earth-shattering movement; the build out from 2008 to 2015 nearly tripled capacity (at an EIA-reported $130 billion in investment)

Total US Wind Generation Capacity

Source: PointLogic Energy and EIA

What does this incremental generation capacity mean in terms of potentially displacing power generation that could have been supplied by natural gas or some other source? The chart below converts wind generation into billion cubic feet per day (Bcf/d) of gas-equivalent burn. Its key assumptions are a capacity factor of 80% and a heat rate of 7,500 MWH per MMBtu. 

 Annual Wind Generation Total Capacity and Usage

Source: PointLogic Energy and EIA

The chart above reveals that at the end of 2015 the U.S. had reached a total wind generation capacity equivalent to almost 6.1 Bcf/d, and this reflected a year-on-year annualized growth of more than 0.7 Bcf/d. (As noted earlier, this comes from the nearly 8.6 GW, or about a 13%, increase for 2015 from 2014.)

The chart above also shows that output from these wind generation facilities is fairly consistent, a little more efficient than one might expect, as they appear to reflect an annualized utilization rate near 80%.

Actual wind output in 2015 was just under an energy-equivalent of 5 Bcf/d as reported by EIA. In the Department of Energy’s (DOE) Wind Vision Report, the 74,000 MW of capacity today is expected to increase to 113,000 MW by 2020, or an increase of more than 52%.

Projecting at least the same utilization rate of roughly 80%, we can expect additional total generation available to increase to 9.3 Bcf/d gas equivalent. Given the 80% capacity utilization, that's actual output coming in closer to 7.3 Bcf/d.   

Breaking Down the Actual Output

The most recent monthly breakdown of wind energy production and consumption data (which are one and the same, as defined by EIA) shows that during the month of November 2015, categorically designated volumes were equal to 187 Bcf, or about 6.23 Bcf/d. This was approximately 20% larger than the previous month and represented growth over the previous year of 2014 of roughly 4.5%. 

Projecting December’s output, we arrive at a 2015 wind production of 1,768 Bcf, representing a gas equivalent load of 4.84 Bcf/d. This would be up from 2014’s total of 4.74 Bcf/d, or a gain of only about 2%.

Considering that the majority of wind farms and turbine clusters associated with this industry are centralized in certain areas of the country, the growth of  wind power has significant ramifications for the gas power generation industry. The chart below depicts the actual annual wind power output over the last eight years, as referenced by the monthly EIA energy composition report.

 Gas Generation Equivalent of Actual Wind

Source: EIA - Monthly Table 10.1 Annual Renewable Energy Production and Consumption

As noted earlier, EIA estimates that new wind power production capacity this year will be 6.8 GW. This will equate to additional wind generation capabilities equaling 0.55 Bcf/d of gas consumption by 2017 and bring total generation capacity to roughly 6.64 Bcf/d by the end of that year.

About 12 states make up 80% of all of the wind capacity in the U.S., with Texas, Iowa and California leading the way with 16,500, 6,500 and 5,500 MW of generation among them respectively. Oklahoma is 4th, and Kansas and Colorado are also in the top ten.

Thanks to wind, as well as gas in some of the states, the power generation market has changed overnight in these  regions. Texas’s aggressive growth plans in this sector have the Lone Star state topping 20,000 MW by next year. 

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Taking a closer look at total natural gas power generation in Texas from PointLogic’s Supply and Demand module shows that generation from gas in the state averaged 4.5 Bcf/d in 2015. Since 2008, power generation from natural gas has increased in Texas by about 15%. However, the U.S. as a whole shows power generation from natural gas increasing by an incredible 45% in that same time, as the U.S.’s annual power generation from natural gas increased from 18 Bcf/d to roughly 26 Bcf/d. The growth of natural gas generation in Texas has not been equally or even close to the rise of natural gas generation in other areas of the country due to incremental wind generation capacity.

The trend towards more use of gas is likely to continue. EIA reported that over the course of 2015, natural gas-fired generation surpassed coal fired generation in every month from July to December, with a 34.8% share of the market compared to 32% for coal. EIA expects this trend to continue in 2016 due to lower gas prices and the continued retirement of coal generation facilities across the country. 

There are other factors to consider. The first is that 2015 was an incredible year: the U.S. alone saw an overall annual increase in power generation from gas of more than 3.5 Bcf/d. So, roughly a third of that 45% increase over that seven-year time frame actually came in the last year alone.

Second, the rapid market share transition from coal and other fossil fuels to natural gas has been unevenly distributed across the U.S., as plant retirements and fuel switching capabilities have become available.

Third, different regions could react different due to renewables. Texas has traditionally been a leader in the nation sourcing its power generation needs from natural gas  for a longer period of time compared with the rest of the nation. Thus, ironically, wind power additions in Texas have a greater propensity to displace natural gas than in other areas of the country. 

In conclusion, based upon the pace and long-term development plans in the wind energy sector, we can conclude that the gas generation side of the power equation needs to remain patient. To some extent, new market opportunities in peak generation will be limited bycompeting sources of power. The gas industry should give more weight to more recent pricing volatility when factoring the value of assets ( barring any unforeseen meteorological events such as the wind not blowing), because it seems that structural issues with peaking and non-peak power needs (Texas has on occasion been generating near 40% of these needs from wind) and other power generation market components will remain day-to-day developing issues for some time to come. 

Stay tuned for additional insight on the future of systemic power generation growth and its impact on natural gas demand in forthcoming editions of Get the Point.  

 

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