Unconventional Gas and Marcellus Play as the Game Changer for the Future of the Power Industry

http://http://jsabillon.wordpress.com/2010/06/09/may-you-be-blessed-to-live-in-interesting-times-chinese-proverb/

ShureLine Construction attended the Power and Light expo and conference in Baltimore May 18-20. Richard McMahon, the executive director from Edison Electric Institute, was the keynote speaker and opened the conference. Of all the players in the power industry: nuclear, coal, biomass, geothermal, CHP, wind, hydro, and solar; Mr. McMahon noted in his first sentence that the “game changer” in the power industry was in fact unconventional (shale) gas, specifically the Marcellus Shale. He felt that shale gas play, combined with renewable energies is going to revolutionize how electricity is generated. Rather, it is the development of horizontal drilling that will improve the hydraulic fracturing process and increase the efficiency of procuring shale gas. NG cost per cf is expected to decrease as supply and demand balance out and ultimately, NG is expected to be 65% cheaper than oil. Mr. McMahon asserted that there has been rapid growth in the past ten years where currently 20% of the natural gas supply in the United States is served by unconventional gas; however, this is expected to surge to 50% by 2035. Shale gas has overtaken liquid natural gas (NGL) as a significant source of NG and has actually served to increase production from older wells that were thought to be inactive/low producers. Although it wouldn’t be economically or logistically feasible to build only NG power plants, 10 NG plants can be built for every 1 coal, effectively over taking the coal industry in the race for power delivery. Instead, the keynote panel collectively agreed that there needs to be a balance struck in the power portfolio as all plants can’t be built of solely one type of power source. Calpine proposed 25 new plants which will largly rely on NG. Not that coal will become a dinosaur; rather it will be a lesser part of the power equation particularly in light of new FERC regulations that are focusing on reducing the carbon foot print of entities of any kind emitting more than 75,000 tons per year (tpy) of the six green house gas emissions. Summarily, collective sentiments were that the introduction of unconventional gas as a major player in the power industry will create a more environmentally friendly trifecta for power delivery, contributing to the industry goal of institutionalizing smart grid technology.

With respect to renewable energy portfolio standards, 31 states have quota requirements to meet with each state having different targets, timelines, and eligible resources with an estimated levlelized cost of new generation. Furthermore, the dominant focus will be on “Smart Grid” transformational technology (using a combination of solar, wind, NG, hydro, coal, biomass, etc. to constitute a power grid to serve a given area as opposed to a traditional singular power source). The power industry expects to see expanded opportunities on the customer side of the meter, smart meter that is, with new customer relationships, better customer energy control and new strategic partnership opportunities (that is taking different power sources/providers and integrating them and/or doing so with existing ones better). Currently in Texas, smart grid technology is in its infancy stage and has taken a foot hold. Duke Energy is planning to install hybrid car charging stations throughout Texas in order to promote mainstreaming their smart grid and renewable energy business model. However, with the current design, if the wind is not blowing that day, or the sun not shining and the energy load has to be drawn from NG, there are not current equations and systems in place to account for who gets what carbon credit and who pays for what when one or the other source is not operating. As far as smart meters go, only 6% of customers have them, and the challenges lie in consumer education and cost/not seeing the savings in the long term as well as who will regulate them (state? Federal? FERC?). At present, the University of Delaware is actively using smart meter technology and the power industry hopes that they will lead the charge for other educational institutions and large energy consumers. It was the general consensus of the panel that how we as a country consume power and how we market power is out of sync so the only logical link is greater consumer education in order to communicate the benefits of the smart meter over thelong term.

Of course another game changer is the environment, with technology bending the curve for carbon emissions capture and how the U.S. climate change will effect economic growth with congress struggling to address this through legislature. Summarily, the electric utility industry will be transformed by significant capital expenditures with cost of capital headwinds, unconventional NG play, climate change, environmental regulation, and smart grid technology. Lastly, increasing cyber security is another major concern of the smart grid and power industry moving forward.

The American Power Act was another central point of discussion by the panel that consisted of members from Duke Energy and Calpine. They collectively agreed that the institution of a good old fashioned conservative cap and trade ultimately drive down the cost of utilities over time. The government is about to invest $1T in new energies with respect to the electric industry, so why not let it be in cleaner sources that will eventually offset the costs associated over time. Essentially, this would necessitate supporting climate change legislation as a key driver. The general sentiments were that it’s a given that costs for utilities will increase over time so why not have those costs be associated with cleaner energy endeavors. Furthermore, it was ironic to hear that the power industry is currently asking to be regulated by the government in order to improve consumer confidence/public opinion and they support amending the Clean Air Act to further prove their point as it hasn’t been re-examined in 20 years. Overall, the theme of the entire keynote was aptly summarized by Mr. McMahon’s reference to the old Chinese proverb: “May you be blessed to live in interesting times.” It is undoubtedly the emergence of the Marcellus Shale play (despite the existence of numerous other NG producing shale lines for decades) into the energy arena that will quickly propel how our lives are electricfied from novel to revolutionary.

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Comment by C Eric Kuenzli on June 16, 2010 at 5:02pm
Very well written! One thing to note, this new Shale play has the potential to significantly change the pipeline grid in the area. Traditionally, gas is transported from the supply regions (ie Gulf of Mexico) to the northeast as well as gas coming in from Canada. This new play has the potential to back up gas into the gulf and reduce long haul deliveries on the conventional gulf to NE pipelines. It may be time for the NYMEX to expand it's contract delivery locations to include a Northeast hub. Will make for interesting times in the gas market!!

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