Take the next step forward to drive capital spending for electric generation.
As the debate continues over the impact of climate change, regulations are already being put into place. The regulations take many forms; however, one form of electric power generation regulation manifests in renewable portfolio standards and greenhouse gas emission requirements imposed by federal and state legislators and the Environmental Protection Agency (EPA). The area that is most interesting, due to the borderless issue of climate change, is the transformative impact the states are playing in the effort to improve sustainability and reduce greenhouse gas emissions.1
Sustainability regulations appear in the form of either voluntary or involuntary Renewable Energy Portfolio Standards (RPS). Greenhouse gas emission regulations take a more direct approach and cap the amount of emissions that can be used to produce the electricity in a given state.
The U.S. Energy Information Administration (EIA) creates a report detailing the number of gigawatt hours of electricity produced in the United States. The most recent report, released in December of 2013, shows that the U.S. produces approximately 4,047,765 gigawatt hours annually. Exhibit 1 illustrates the five states with the highest production and the gigawatt hours they produce.
In Exhibit 2, per the EIA report, coal is the fuel for the majority of electricity generation in the United States. Natural gas produced the second largest amount of electricity, and renewable energy sources comprise about 13% of the electric generation.
States have enacted RPS programs in an attempt to address the reliance on fossil fuels and uranium required for nuclear power. In all but eight states, state legislators have established regulatory targets for renewable energy. A sample of leading states is in Exhibit 3.
These requirements create an opportunity for new construction. For example, states require that utilities source their power from renewables, and this has generated an increase in spending across the construction value chain. In its most recent investor presentation, Quanta Services has highlighted the double-digit growth opportunity driven by new regulation causing increased grid investment as well as a changing generation mix towards renewable and natural gas generation projects. These projects range from refurbishing the inner workings of hydroelectric power plants to building wind and solar farms to creating additional transmission capacity to reach these renewable sources of power.
n addition to RPS requirements, regulation of greenhouse gas emissions in the generation of electricity will also change the generating landscape. In California, any construction or purchase of new power plants designed for baseload generation has a limit of 1,100 pounds of CO2 per MWh. Maryland has enacted legislation to reduce greenhouse gas emission by 25% prior to 2020 of which 45.6% will come from the energy sector. Three programs are now in place to achieve this goal, including a Regional Greenhouse Gas Initiative (“RGGI”), the EmPOWER Maryland Initiative and Maryland’s RPS program. RGGI is a multistate cap and trade program for Maryland’s existing power plant facilities. EmPOWER is primarily a conservation program aimed at reducing the demand on the system, and the RPS program requires an uptick in the power generated by solar facilities and other renewable sources.
To meet the increasingly restrictive greenhouse gas emission requirements, one must understand the amount of carbon dioxide produced through the varying fuel sources. This data is typically reported in pounds per million BTU. One billion BTUs is equal to approximately 0.3 gigawatt hours. A summary of key fuel sources appears in Exhibit 4 and is derived from a report by Hodges and Rahmani from the University of Florida.
Before looking to renewable generation, natural gas is an interim solution to the emission requirements. Natural gas generates 45% less carbon dioxide per million BTU. Through a combination of new facilities and conversions from coal to natural gas, producers can substantially reduce their carbon footprints. Industrial EPC companies have been successful at taking a turnkey approach to these conversions, thus benefitting from the current regulatory environment. For example, URS has highlighted its ability to meet these regulatory requirements by offering clean coal balance-of-plant systems or natural gas conversions.
Leveraging a Proactive Approach
Contractors and engineers can benefit from the proactive approach by state legislators to implement greenhouse gas emission reduction and sustainability regulations. The regulatory requirements will influence the construction of new generation facilities. For states to meet their regulatory requirements, solar, wind, geothermal and hydropower generation must be brought “online” or connected to the state’s power grid. This has resulted in a number of interesting interconnect projects. Minnesota Power has applied to build a 500-kilovolt Great Northern Transmission Line to connect Minnesota to the clean hydropower generated by Manitoba Hydro. Five different transmission projects have been proposed to connect New England to the hydropower generated in Canada to the north. The projects include the Northern Pass, a $1.4 billion, 187 mile transmission connecting Hydro-Quebec to Southern New England; the New England Clean Power Link, a $1.2 billion, 154-mile project connecting Lake Champlain to Vermont; the Northeast Energy Link, a 230-mile project connecting Maine and Canada; the Green Line, a 350-mile project connecting wind power from Quebec to Maine; and the Grand Isle Intertie, a 60-mile project bringing wind power from Northern New York to Vermont. Substantial right-of-way, construction, interconnects and substation work will be necessary to complete these projects and bring the utilities in compliance with state regulations.
The electric power generation market has changed dramatically over the last 10 years. In order to take the next step forward, new construction, conversions and interconnects will drive capital spending for electric generation. Q
Daniel Shumate is an associate with FMI Capital Advisors, Inc., FMI Corporation’s registered Investment Banking subsidiary. He can be reached at 919.785.9266 or via email at firstname.lastname@example.org.
1 (Rabe, 2006)
2 Maryland Department of the Environment, Maryland’s Greenhouse Gas Reduction Plan: Executive Summary. 2013.
3 This document is FE796, one of a series of the Food and Resource Economics Department, Florida Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida. Original publication date March 2009. Reviewed January 2012. Visit the EDIS website at http://edis.ifas.ufl.edu.