Texas eyes one fossil fuel as prospects dim for another

By Edward Klump, Nathanial Gronewold | 11/02/2015 07:19 AM EST

HOUSTON — Texas, it might seem, has been slow to get the memo on coal. The state still has about 20 coal-fired power plants plugging away, according to a Sierra Club tally. It remains the top carbon dioxide emitter in the country, and coal generated over a third of the electricity used in Texas’ main power market last year. Yet behind that facade, the generation mix is shifting.

HOUSTON — Texas, it might seem, has been slow to get the memo on coal.

The state still has about 20 coal-fired power plants plugging away, according to a Sierra Club tally. It remains the top carbon dioxide emitter in the country, and coal generated over a third of the electricity used in Texas’ main power market last year.

Yet behind that facade, the generation mix is shifting.


Observers and planners suggest thousands of megawatts of Texas coal-fired generation could be ripe for closure in the wake of new U.S. EPA regulations. Coal already is an afterthought for anyone planning new capacity for Texas’ main grid as renewables and natural gas — itself a fossil fuel, albeit with less carbon emissions — dominate proposals.

To Richard Kinder, executive chairman of Kinder Morgan Inc., the future of electricity is intertwined with the future of natural gas and the future of Texas.

Kinder, speaking during a recent earnings call for his pipeline company, cited Wood Mackenzie in saying there could be a 40 percent increase in gas demand by 2025, with electric generation playing a prime role. He said reliable and flexible gas plants are needed to back up wind and solar.

"The idea that we can move directly from coal to renewables without increasing natural gas usage for electric generation is an unrealistic pipe dream, with the substance in the pipe being legal only in Colorado and Washington state," Kinder said.

Looking broadly, Kinder turned to federal data in suggesting the mix of gas in power generation could rise to 39 percent by 2030, compared with 32 percent today. And Kinder pointed to his own company, where gas transportation volumes for electric generation were up about 18 percent year to date versus the same period in 2014.

Figures from the Electric Reliability Council of Texas (ERCOT), the state’s main grid operator, show the sort of trend that makes gas advocates smile. Kinder cited a generation mix that was 49 percent natural gas through July of this year, while the operator showed less than 40 percent in the year-earlier period.

ERCOT lists nearly 63,000 megawatts of generation projects on the drawing board. Those developments won’t all happen, but proposals for 22,598 MW are the most likely given their interconnection agreements.

Of that total, almost 11,000 MW of plans involve wind. More than 9,500 MW count on natural gas. About 1,500 MW are from solar. Coal? Try 240 MW.

Expansive gas infrastructure

That final sliver may relate to a carbon-capture plant Summit Power is trying to develop in West Texas. The coal project has been on an uneven path, though backers recently expressed determination to move forward despite some headwinds (ClimateWire, Sept. 23).

A few traditional coal-fired units have been built in Texas during the last decade. For example, Energy Future Holdings Corp., as part of its transition from TXU Corp. amid a leveraged buyout, moved ahead with three coal units while agreeing not to build eight others. Some projects, including one named the White Stallion Energy Center, didn’t materialize.

Brazos Valley
Calpine Corp.’s Brazos Valley power plant in Texas uses natural gas. | Photo courtesy of Calpine Corp.

There’s just little talk of building coal generation any longer, especially as U.S. EPA’s Clean Power Plan seeks to cut CO2 emissions from power plants in the years ahead.

"I don’t think any traditional coal plants are ever going to get built in Texas," said Al Armendariz, a deputy regional director at the Sierra Club in the Beyond Coal campaign and former EPA regional administrator.

Armendariz said coal has been under pressure nationally for several years because of organized opposition as well as low prices for power and natural gas and the massive growth of renewable energy.

Meanwhile, suppliers and distributors are laying the groundwork for a gas-dominated future in Texas’ electricity generation.

Enterprise Products Partners LP controls one of the largest pipeline networks in the state and over 8,000 miles of pipe that the company said "gathers and transports natural gas from supply basins in Texas and offshore in the Gulf of Mexico for delivery to local gas distribution companies and electric generation and industrial customers."

Another Enterprise network moves gas from the Haynesville Shale in Louisiana and other regions to East Texas. Drilling activity was robust in the Haynesville until natural gas prices plummeted and interest shifted to shale oil. Industry insiders anticipate a revival of Haynesville and Barnett drilling over time as gas prices recover.

Texas used to be a reliable supplier of gas to the northeastern United States, but that picture shifted with the rise of the Marcellus Shale in Pennsylvania and West Virginia, by far the largest natural gas basin in the United States.

Analysts at Bentek Energy believe the Northeast gas region, including the Marcellus and Utica shales, will become a net exporter this year and eventually the largest source of gas in the nation, topping Texas.

Role for Mexico

Much of the pipeline infrastructure has been reversed to carry gas and gas liquids south instead of north. A lot of this investment is geared at moving gas liquids and condensates to petrochemical manufacturing facilities at complexes east of Houston.

Though it has been investing heavily in infrastructure to export natural gas from Texas to Mexico, Oklahoma-based ONEOK Inc. said it’s bullish on gas for use in Texas’ power system.

"We believe natural gas will be the fuel of choice for electric generation in Texas and across the U.S. and Mexico," said Stephanie Higgins at ONEOK.

Much of the attention has been on oil and gas reforms south of the border, but changes in Mexico’s power sector may prove to be transformative in the years to come.

In April, ONEOK announced a joint venture with a gas infrastructure company to build a line to carry gas from the lucrative Permian Basin in Texas to Mexico. Higgins, in an email, called it "a gateway asset that will connect Mexico’s rapidly growing natural gas markets with U.S. producers in the Permian Basin."

At a recent discussion hosted by Rice University’s Baker Institute for Public Policy, Tania Ortiz Mena, chief development officer with IEnova, suggested 2016 will be the year when big changes begin to occur in Mexico’s power markets.

Gas producers already are anticipating a lift to pricing once liquefied natural gas export projects in Texas get started. Higher prices for gas will make investments in new gas-fired generation less promising.

But the supply picture and investments in transportation suggest there will be plenty of gas for Texas power companies, Mexican power generators, industrial end users and LNG exporters alike. Prices for their feedstock may climb but it is unlikely to approach the levels seen when Texas began to deregulate its electricity markets more than a decade ago.

Skepticism remains over how much gas coming LNG projects will take.

"They could be using lots of gas, or they might not," explained Andy Weissman at EBW AnalyticsGroup during a recent call. "Spot market prices for LNG are at extremely low levels, so there’s an open question as to whether all the cargoes will be taken."

‘Gas integration is taking place’

Navigant Research sees U.S. gas supply reaching 110 billion cubic feet per day by 2035. Supplies expanded in 2014 by about 9 percent despite the low price environment, driven mainly by Northeast gas producers, according to analysts there.

"More growth in gas production is expected in the future, particularly from the Marcellus Shale formation, with the only possible constraint the rate of infrastructure development in the region," that firm said in a recent report on the topic.

Marcellus and Utica shale producers also will compete with large gas basins in Texas and Louisiana, where most Texas power companies are likely to get their supplies.

Gas-directed drilling activity remains weak in the Barnett and Haynesville shales, but improvement in the economics of exploration and production should see companies taking advantage of this abundance of rig availability.

And the industry is all too aware that there is still plenty of shale gas to exploit in the Barnett, Haynesville and Eagle Ford.

Some see the beginning of a deeper integration of gas and power in North America.

Networks in the United States and Canada are already closely intertwined — in the Northeast, gas will move from the United States to Canada even as power moves in the opposite direction, while on the West Coast Canadian gas supplies the U.S. Pacific Northwest.

Ortiz Mena thinks a similar knitting-together will gradually emerge along the Texas-Mexico border. "Gas integration is taking place as we speak," she said.

Future policy is uncertain, but there are plenty of true believers in gas’s future as the dominant source of U.S. electricity. Christopher Click, an oil and gas adviser at KPMG LLP, thinks the writing is on the wall for coal, even in Texas.

"Long-term demand for coal will continue to decline, making room for natural gas," he said.

For Jim Marston of the Environmental Defense Fund, key developments in his years in Texas environmental work include the buildout of renewables and cancellation of most of the 11 coal-fired units planned by the former TXU.

He said Energy Future, which filed for Chapter 11 bankruptcy last year, would be in even worse shape had it built even half of the planned generation.

Backing up renewables

John Fainter, president of the Association of Electric Companies of Texas, said coal plants can have difficulty competing with other fuels, and he noted that more people are getting into solar as wind projects continue to be developed.

But Fainter said some coal will stick around for reliability. He said technology and economics will drive what happens to coal plants, along with legal outcomes of any challenges to the Clean Power Plan.

"I’m not aware of anybody that would undertake to build a new coal plant at this point in time," he said, referring to traditional plants: "Whether the plants can be modified or not I think is an individual, plant-by-plant assessment."

As changes happen, the Sierra Club’s Armendariz doesn’t want to see a surge in gas in a transition, even if it and coal continue to play a role.

"We think the best scenario is to gradually phase out these coal plants and replace as much of that generation as we can with wind and solar power," he said. "We think you can do it by distributing that generation across the state."

Armendariz added: "I am optimistic that over the next few years we are going to see a large number of these coal plants in Texas retire or announce that they’re soon going to retire."

But Kinder, who co-founded Kinder Morgan, cautioned that wind and solar need to be considered in context.

"Now renewables get a lot of attention, and they should, but let me put them in perspective," he said. "To be frank about it, they’re small and less reliable."

Kinder rattled off more numbers, saying wind and solar accounted for a limited percentage of U.S. power generation last year and had capacity utilization numbers below 35 percent.

"Now that should not come as a surprise to anybody with any common sense because we should realize that the sun doesn’t shine all the time and the wind doesn’t blow all the time, but some people have apparently neglected that understanding," he said.

Kinder added: "What this really means is that reliable, flexible natural gas facilities are absolutely necessary to back up wind and solar."