The economy is still uncertain and - despite last year's government stimulus program and increasing environmental standards and regulations - lenders are still cautious when it comes to financing large-scale energy projects.
From my vantage point, we're probably stuck with these market conditions for the next 12 to 18 months, although a bright spot may be the banks' willingness to support certain wind power projects. This potential financing activity stems from downturn-induced reductions in power load demand, which have allowed us to utilize more renewable energy projects to fill our power needs.
But when the economy starts to pick up, and load demand increases, we could pay a significant price for the ultra-conservative development practices we've recently been experiencing. Why? Because we'd then need more power plants than the frozen development pipeline has permitted since the markets seized up toward the end of 2008.
We'd especially need natural gas combined cycle plants if, as expected, many coal plants are retired due to their age and environmental concerns. With high efficiencies, high reliability, relatively low emissions, and size to their credit, natural gas combined cycle plants are the logical replacements for our aging power plants.
Time and Money Are Problems
Unfortunately, there are only a handful of new natural gas combined cycle plants in the financing pipeline right now. And, to compound the problem, it usually takes one to three years to develop and finance one of these plants, and then an additional two years to get it on line. Another obstacle is development cost. Building a natural gas combined cycle plant typically runs $600 million-$800 million; but most developers don't have strong enough balance sheets to purchase expensive equipment like turbines from vendors to speed up the development process, and it is difficult to obtain financing for major equipment with the current market conditions.
Developers also have long memories, and they'll never forget the late 1990s and early years after 2000, when natural gas combined cycle plants shot up everywhere, only to be followed by the fall of Enron and the ensuing crash of the power markets.
But the potential shortage of natural gas combined cycle plants isn't just a result of the credit squeeze or developer caution; it also stems from major infrastructure constraints and confining public policies.
Limited Energy Options
I'm particularly perplexed as to why Washington hasn't developed a comprehensive energy policy that looks forward and prepares us for the retirement of our aging coal power plants. This shortsightedness is putting even more pressure on the development and financing of natural gas combined cycle plants.
Renewable energy is only part of the solution, but it simply can't produce enough reliable power to replace coal right now. And, I believe that in certain places like Illinois or Pennsylvania, coal plants make sense - especially with new technologies that can help reduce emissions. But green politics and red tape make it hard for coal plants to get a fair shake today and the same goes for nuclear power plants.
So with these limitations clearly fixed in place, and the credit markets still jittery, how are we going to prepare for the inevitable uptick in the economy and the ensuing demand for additional natural gas combined cycle plants?
The Role of Utilities
It seems to me, almost by a process of elimination, that the utilities will have to step up and play a role here. For the most part, utilities have plenty of cash on hand and can adjust their rate base and pass the project costs on to their consumers. This potential burden for consumers could possibly be avoided if independent power producers, who can build new plants quicker and cheaper, are able to cover their development costs and get financing for their projects.
The government could help, too, by offering developers short-term grants so they can build the next-generation natural gas combined cycle plants. The real financial crunch for developers comes in the first couple of years, when they are putting plans together, acquiring land and securing power purchasing agreements.
On the surface, it might be hard for the Department of Energy to justify a grant program for developers, but failure to act could have grave consequences for the nation as a whole. Indeed, after struggling through a severe economic reversal for several years, the last thing the country needs is a power plant shortage that leads to painful dislocation and dysfunction in communities from coast to coast.
Getting Out of the Box
We got boxed in by unprecedented market conditions, an understandable failure of nerve on the part of developers, antiquated infrastructure that holds us back, and politics and policies that reduce our energy choices. And now we need to escape from the box by financing and building a new wave of natural gas combined cycle plants that will help us meet recovering load demand in the coming years.
Getting out of the box means thinking outside the box, but it also means that developers and lenders must summon up the courage to assume moderate and tolerable risk.
Trent Markell heads the Project Finance / Independent Engineering team at Harris Group Inc., one of the premier mid-market engineering firms in the U.S.