ICForecast Energy Outlook: Regulatory Complexities And Natural Gas Economics Driving Power Markets

ICF International, a leading provider of consulting services and technology solutions to government and commercial clients, has released its ICForecast Energy Outlook for the fourth quarter of 2014. This study highlights the near-, mid- and long-term future impacts of proposed U.S. federal environment regulations, including up-to-date analysis of the U.S. Environmental Protection Agency’s (EPA) rule and regulation activities; gas, coal and power market prices; and coal production and renewable energy development.

Regulatory Issues: ICF’s retirement projection for U.S. coal plants leading up to the compliance date for EPA’s Mercury and Air Toxics Standards rule remains steady in the range of ~60 GW, based on a regulatory portfolio that includes CO2 limits. As the EPA moves forward with the rulemaking process for its proposed Clean Power Plan and U.S. states consider alternative paths to compliance, expected unit retirements, fuel prices and power prices will shift. Recent CO2 proposals for new power plants (New Source Performance Standard and Existing Source Performance Standard) will further strengthen current market trends favoring natural gas and renewable technologies.

Natural Gas Market: The mild summer of 2014 has provided some breathing space for natural gas markets. Strong injections throughout the summer have helped rebuild storage inventories, but seasonal working gas levels are still well below recent years. Over the next 18 months, ICF expects gas prices to firm, but then decline because of continued strong production growth, primarily from the Marcellus shale, stretching from West Virginia through Pennsylvania. Looking farther into the forecast, ICF expects that increased gas exports (in the form of liquefied natural gas and pipeline exports to Mexico), a surge in demand from the petrochemical industry and a continued shift from coal toward gas in the power sector will all place upward pressure on gas prices through the remainder of the decade. As demand growth accelerates, the potential for price volatility will increase.

Coal Market: Although the mild summer has provided breathing room for natural gas, it has been a disappointment for the coal sector that was hoping for a boost in demand and coal prices. Coal stockpiles remain below average because of lingering rail delivery issues, and are not expected to normalize until well into 2015. Over the next 10 years, coal consumption is expected to remain relatively flat, with the biggest hope for producers being the export market. Hindering export growth is the continued decline of international coal prices, which make U.S. coal less competitive and will keep exports depressed over the next several years compared with the record high exports in 2012.Coal demand will remain flat despite the expected coal retirements through 2016 as ICF expects the remaining coal plants to run at somewhat higher capacity factors.

Renewable Market: An extension of the Renewable Electricity Production Tax Credit (PTC) is looking increasingly unlikely in the current political environment; more than 50 House Republicans recently penned a letter to House Speaker John Boehner requesting a permanent end to the PTC. As a result, in regions where wind is not economic, renewable portfolio standards will be responsible for driving development opportunities. Conversely, the landscape for distributed renewable energy continues to evolve, as stakeholders prepare for the continued rapid growth of distributed solar in their respective states.

Power Market: The U.S. power market will add nearly 225 GW of new capacity by 2030, beyond what is already under construction, to meet demand and state renewable portfolio standards. Wind and solar technologies will continue to dominate the renewable build mix, but low capacity factors keep their share of total generation constant to slightly declining over time. In absolute terms, coal generation remains almost flat through 2020. More efficient, newer coal units increase dispatch to replace generation lost from retirements. By 2030, the CO2 price will be high enough to force more coal out of the dispatch stack, and gas starts to dominate the generation mix. By 2037, retirement of nuclear units provides further momentum to gas-based generation.

“Generation owners must make investment decisions today with an eye to future regulatory requirements that will impact the longevity and valuation of their assets,” said Chris MacCracken, principal for ICF International. “Coal unit retirements and rising gas prices will further complicate their forward view, demanding that they evaluate a range of futures rather than just one.”

The ICForecast Energy Outlook addresses a number of significant issues, including:

• Regulatory: Progress of existing regulatory issues and their impact on power and fuel markets
• Natural Gas: Views on natural gas demand to 2037 and how that affects power and other markets
• Coal: Coal pricing, retirements and regulation effects on generating markets
• Renewable: Renewable energy and the effect of not having long-term energy policy certainty
• Power: Power market supply/demand trends and future pricing effects

Using a suite of proprietary analytical tools and by incorporating global expertise from all areas of the industry, ICF utilizes a fully integrated assessment of wholesale power, transmission, fuel and emissions markets in order to offer the most complete picture of the energy industry. The report offers insight into the key areas of emissions, gas, coal, renewable energy and power.

About ICF International
ICF International provides professional services and technology solutions that deliver beneficial impact in areas critical to the world's future. ICF is fluent in the language of change, whether driven by markets, technology, or policy. Since 1969, we have combined a passion for our work with deep industry expertise to tackle our clients' most important challenges. We partner with clients around the globe—advising, executing, innovating—to help them define and achieve success. Our more than 4,500 employees serve government and commercial clients from more than 70 offices worldwide. For more information, visit http://www.icfi.com.