Now that elections are over in the US, we thought it would be useful to review some of the broader policy implications of the changing administration for the electric utility industry. There are four themes we want to cover here: environment regulations, prospects for natural gas usage, power generation, new nuclear-powered generation.
The incoming Trump administration has made no secret of the fact that they believe climate change is a hoax or a non-issue. As a result we should assume that the mandate of the Environmental Protection Agency will be curtailed as much as possible. Obvious regulations heading for the chopping block include CO2 emissions standards and perhaps methane emissions remediation at gas wells. Our broader point here, regardless of one's personal views, is that this is not a radical departure from present policy. At present, utilities are beginning to experience record growth and they are ordering new gas fired power plants and considering life extensions for coal plants in addition to renewables. Our only question is whether or not we see a new coal fired plant built.
This is what two large utilities, Duke and Southern Company, are doing so we can take it to be somewhat representative of the industry’s direction here. One caveat here is that Southern Company’s Georgia Power is experiencing extremely high demand growth from a cluster of planned data centers in the Atlanta metro area. Just to provide some orders of magnitude, the company’s Integrated Resource Plan for 2022 anticipated new power plant needs of 400 MWs. A year later this estimate was revised to 6,000 mws! And one respected analyst has suggested even this greatly revised figure is way low.
Our broader point here is that the US electric utility industry is getting the power plant transition it always wanted, from base load coal to base load natural gas unfettered by environmental regulations. The biggest difference to us is that the Biden administration permitted fossil fired new build with a lot of tut-tutting about offsets etc. Now the new build will continue, probably at an accelerated pace, but without the tut-tutting and without the environmental offsets.
Natural gas is clearly the big winner here as a prospective boiler fuel and for power plant builders. The US produces a lot of gas, especially from shale. We expect to see gas production ramp up, new pipelines will be considered, and new gas fired power plants ordered. The new administration has already promised to resurrect the Keystone Pipeline. But for the reasons cited above, that this expected growth was already happening, it’s hard to see how much incremental benefit the industry can get. The best we can say is that the industry benefits incrementally from regulatory benign neglect, kind of like the meatpacking industry.
Lastly, our ambivalence about the prospects for new nuclear development in the US should be understood in terms of the energy trilemma: nations want their electricity to have three principal characteristics—that it be affordable, secure (no Russian gas), and sustainable (no/low emissions). Once we eliminate environmental sustainability concerns from the mix, as we expect the incoming administration to do, then prospective power plants will be evaluated on the cost and security of domestic supply. This favors the construction of new gas-fired generation as we are beginning to see.
Coal-fired plants would be a logical second choice. A new nuclear plant is about four times the cost of a new gas fired power station. If environmental benefits are considered irrelevant, why should anyone choose to build a new nuclear power station selling a commodity, electricity, produced at a very high price. If we think of a power plant as a factory selling widgets instead of energy, we should ask, why would anyone build a factory guaranteed to sell its product at a large loss? The question answers itself. They wouldn’t. This is the dilemma for new nuclear power plant construction. Economics is not on its side and never has been. And now their big selling point, zero carbon electricity, has been rendered irrelevant by the incoming administration. If we were advising the nuclear power industry, we would suggest they emphasize the security of supply in the context of heightened international tensions and forget about sustainability. Why? It’s the best argument they have.
In short, big spending, full steam ahead, and if we are right, spending more than the already big numbers the utilities now contemplate.
By Leonard Hyman and William Tilles for Oilprice.com
