U.S. utilities gain strategic insights by playing out a carbon-constraint scenario.
Tim Gardner is senior adviser and James Hendrickson is vice president with Booz, Allen & Hamilton in Washington, D.C. Contact Gardner at Gardner_Tim@bah.com.
The U.S. power industry stands frozen in the headlights of the onrushing worldwide CO2 crisis. While power demand continues growing, and reserve margins continue shrinking, uncertainties in long-term natural-gas prices, carbon regulation, and clean-technology alternatives create a prohibitive level of investment risk for most power companies.
Moderate changes in the costs of gas or carbon credits can have a dramatic impact on the economic viability of coal-fired power plants (see Figure 1). If coal plants shift positions with gas plants on the dispatch curve, the economics of all generation sources will be affected profoundly.
In the present state of policy uncertainty, companies are prudent to try muddling through. A sharp drop in planned generation investments between 2005 and today suggests many companies in America’s power industry have adopted this approach (see Figure 2).
But the industry can’t postpone investments to meet growing power demand and replace aging capacity indefinitely. Although the current RPS-driven investment in renewable-power capacity is useful and important, it is at best a very partial response. Society’s long-term power needs dwarf the current scope of “no-regrets” moves.