IHS Forum: North American power outlook

The North American power markets are expected to grow 14% by the end of the decade while undergoing several changes as well as potentially disruptive challenges. These challenges include demand growth and energy efficiency targets, federal carbon policy, and distributed generation.¹ Despite lower expectations about electricity sales which contribute to growing uncertainty about opportunities in the power sector, IHS expects electricity demand compounded growth of 1.8% by the end of the decade on the strength of a recovering economy and difficulties yet to come in achieving higher efficiency targets.

It’s not only about cost. Policy matters.

Parallel to demand growth, 10% of electric power generating capacity is expected to retire this decade- half of which comes from coal retirements. These are driven by various policies particularly by the Mercury and Air Toxic Standards (MATS) that will come into effect April 2015. Other retirements are driven by older inefficient fleet.  Low natural gas prices, as a result of the shale gas boom in North America, will allow gas-fired power generation to fill in the lost generation from retirements. Due to low natural gas prices and continued states’ support for renewable generation, IHS expects new capacity additions to be dominated by natural gas, wind and solar in the United States and by hydro in Canada, whether to meet demand growth or owing to policy directives.

The picture of generating capacity additions in North America for the remainder of the decade is tilted towards renewables constituting 50% of additions with potential substantial growth in distributed solar generation. Renewables’ share of total North America power generation is expected to increase from 2% in 2010 to 7% by 2020. Distributed solar generation is a growing market, but remains very small and concentrated in only a handful of states such as California and New Jersey.

Natural gas constitutes the remaining 50% of capacity additions by 2020. Its share of North American electric power generation is expected to increase from 20% in 2010 to 33% 2020.

Power markets remain in supply-demand equilibrium well past the middle of the decade, dampening the immediate need for investment decisions in many regions except for Texas and the Central Plains. These areas face serious capacity constraints and need about 10 GW of added capacity to support growth.

Natural gas raises some long-term issues

Low-cost natural gas provides benefits in replacing coal and nuclear generation, especially over this decade, but it also raises several issues:

• Fuel diversity: Resorting to substantial gas-fired generating capacity additions threatens the diversity of the fuel mix in electricity generation.
• The “Missing Money Problem”: low natural gas prices aggravate, but do not cause, the missing money problem in North American power markets. Low natural gas prices also force out well-functioning but uneconomic plants.²
• Carbon emissions: despite the fact that natural gas is less carbon intensive than coal, increasing natural gas consumption in electricity generation due to demand growth still increases carbon emissions overall.

Natural gas plays a crucial role in helping power markets transition through carbon policy changes and overcome some of its challenges. However, from an environmental policy perspective, the need for a long-term carbon-free source of energy still remains.

All said, the future of the power sector in the eyes of regulated utilities is seen as a period of profound uncertainty and little appetite for new investments, given concerns about low demand growth, distributed generation, state policy requirements, and the specter of future carbon limitations.

¹ Distributed generation (DG) refers to electricity that is produced at or near the site that it is used. For example, distributed solar energy is typically connected to the local utility distribution grid and could be located on rooftops or ground-mounted.

² The “Missing Money Problem” arises when occasional market price increases are limited by administrative actions such as price caps. By preventing prices from reaching high levels during times of relative scarcity, these administrative actions reduce the payments that could be applied towards the fixed operating costs of existing generation plants and the investment costs of new plants. The resulting missing money reduces the incentives to maintain plant or build new generation facilities. In the presence of a significant missing-money problem, alternative means appear necessary to complement the market and provide the payments deemed necessary to support an appropriate level of resource adequacy.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.