National Energy Technology Laboratory (NETL)

Investment decisions for baseload power plants

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Executive Summary

This six-volume report is designed to provide a detailed understanding of the key drivers and processes that affect private entities in the United States (U.S.) as they consider investing in baseload generation capacity. The report was prepared by ICF International at the request of the National Energy Technology Laboratory (NETL).

Volume I of this report identifies the key factors that power companies should consider in managing the risks associated with investment decisions in new baseload electric generation capacity. Investment uncertainty is problematic because the power industry is one of the most capital-intensive industries in the U.S., and accounts for a large portion of the nongovernmental, non-financial debt raised in the U.S. Uncertainty complicates this financing process.

The five major risk factors surrounding the decision to build baseload generation are summarized below. They affect both the utility and independent power producer (IPP) sectors:

  • Natural Gas and Oil Prices – The low and stable natural gas prices in the 1990s were a key predicate for the overwhelming interest in gas-fired power plants in recent years. Similarly, the rise of gas prices and their volatility have been a key factor driving the search for alternative new generation options.
  • Carbon Dioxide – At the very time U.S. utilities were turning away from gas to coal, concerns about carbon dioxide (CO2) and climate change came to the fore. The increasing likelihood of CO2 regulation, especially the potential for Federalregulation, is making coal less attractive compared to other alternatives, and increasing interest in technologies that decrease the carbon footprint of coal.
  • Capital Costs – Over the last two years, there has been a record level of growth in power plant construction costs. The average cost of building a plant in the U.S. increased over 50 percent from 2006 to 2008. This rapid rise in power plant costs makes investment in baseload plants in particular more risky because they tend to be more capital intensive. The run-up in capital costs was a factor in many utilities’ decision to revise cost estimates and, in some cases, delay or cancel projects.
  • Renewables – A large number of states have renewable portfolio standards (RPS), and a federal RPS could be enacted by Congress in 2010. Among the legislative proposals being discussed is an RPS of 20 percent of generation by 2020. Renewables combine two features that have increased popular support: energy security and lower CO2 emissions. However, they can be expensive, are often located far from load centers, and contribute little to grid reliability. Implementing a Federal RPS could delay decisions to build new baseload capacity.
  • Demand and Demand-Side Management – Recently, the focus on demand-side management has greatly increased with state actions, as well as with the American Recovery and Reinvestment Act of 2009 (the “stimulus bill”). Furthermore, the recent sharp decline in electric demand and related drop in capital expenditures increases the risks that investors in baseload electric generation capacity face concerning future demand growth.

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