Transco Zone 5 (Z5) provided a home for swelling Northeast production growth and associated natural gas infrastructure projects to move that growth in the past. With Transco's Atlantic Sunrise project adding 1.7 Bcf/d of capacity into Z5 and EQT’s Mountain Valley Pipeline adding an additional 2 Bcf/d of capacity within the next year, will demand growth in Z5 be able to absorb all this extra supply?
Genscape believes Z5 has existing but limited potential to absorb Northeast production growth. New natural gas forward supply from the constrained Leidy area will remain competitive into Z5 and should result in decreased spreads between Leidy and Z5/Z4. This will not only result in lower prices in Z5, but will ripple even further south to Z4.
The Demand Picture
Comprised of Virginia and the Carolinas, Z5 is a massive demand area susceptible to price spikes due to its supply isolation and competition with an adjacent, similarly large demand area, Transco Z6. Increasing supply found a home in Z5 as structural demand rose steadily over the last ~10 years. Even with incomplete data for 2018, gas demand per degree increased year-over-year (YOY). For example, in summer 2007, Z5 consumed an average of 1.13 Bcf/d at a normal temperature range; yet, last summer, Z5 consumed 3.62 Bcf/d at the same temperature range. This structural growth is primarily a result of increased gas-fired generation within the zone because of overall increases in power generation and fuel switching.
Total power generation in the Z5 area increased, but not necessarily due to demand for power increasing. The Energy Information Administration's (EIA) state level generation data showed total generation increased for all three Zone 5 states, from 32.1 average gigawatt hours (AGWHs) in 2001 to 36.3 AGWHs of generation in 2017. However, retail sales data suggests power demand (as opposed to generation) grew from 33.1 AGWHs in 2001 to a peak of 38.0 AGWHs in 2010, before decreasing to 36.4 AGWHs in 2017. The tightening differential between generation and retail sales is a result of Z5 curtailing imports from states within the Southeast Electric Reliability Council (SERC).
Gas burns historically benefit from increased intra-zonal generation and fuel switching. Nuclear generation remains the largest part of the stack at 14.5 AGWHs (~40.0% of total generation), and remained relatively flat since 2001. Gas-fired generation increased from 0.8 AGWHs in 2007 to 11.7 AGWHs in 2017. This increase in gas fired generation comes from the displacement of coal; coal contributed 7.2 AGWHs in 2017, down from 17.9 AGWHs in 2007. Other forms of generation include hydro, solar and wind, biomass, and petroleum-based fuels. Their share of the stack rose rapidly since the early 2000’s, driven by solar generation (especially in North Carolina), biomass, and wood fuels.
When EIA released their annual data, South Carolina’s gas generation trailed behind coal generation on the state-level, but finally surpassed coal in March 2018 as of the most recent EIA monthly data. In North Carolina, nukes, coal, and gas are roughly equal parts of the generation stack, collectively contributing between 26 percent to 32 percent of total generation; though gas’ share developed rapidly since 2009, again, at the expense of coal. Utility-scale solar grew rapidly since 2012, but still only comprises 0.6 AGWHs of the total stack.
Virginia experienced the fastest load growth for natural gas as well as its total stack, which gas is now the largest part of, comprising 49.5% of total generation. Coal’s share fell drastically from 4.0 AGWHs in 2007 to 1.2 AGWHs in 2017, just above the 1.1 AGWH aggregate of all other fuels.
Increased gas burns in this region are visible down to the meter level. Just this year, Transco added meters for the 475 MW Kings Mountain Energy Center in North Carolina, and the 1588 MW Greensville County Power Station in Virginia. The Greensville Plant has a reported operational capacity of 358 MMcf/d, but it only saw preliminary nominations and isn’t expected to be fully operational until December 2018—well after Atlantic Sunrise Phase 2 comes online.
Elsewhere in SERC, we see declining power imports into Z5 in the form of declining coal generation in Tennessee and Kentucky. Coal comprises much of the stack, meaning that there is massive opportunity for fuel switching in these states.
There may be additional opportunities in Zone 5 created by the introduction of lower cost gas supply from new projects such as Atlantic Sunrise. Opportunities for gas-fired generation based on the displacement of coal are still significant but finite. Based on 2017 utilization rates, replacing the remaining coal in the region with new gas plants would create an additional 1.1 Bcf/d of demand.
In the very long term, there may be opportunities for gas to displace nuclear generation. The biggest hurdles to nuclear generation are massive startup costs and amortization. In 2017, deveopers abandoned plans for adding two more reactors to the VC Summer nuclear plant in South Carolina because they excessively surpassed their budget. However, once nuclear plants are online, they are difficult to displace save for retirements. Fuel is a smaller part of a nuclear plant's operating costs compared to fossil fuel plants, and there is the need to recoup a return on investment over a longer time.
Maintenance for nuclear plants can be very expensive since much of the nuclear fleet is over 30 years old, and the lack of carbon credits in some states make them more uneconomical to run. For some plants, operational costs can be higher than the 24hr price of power. Virginia discussed joining the Regional Greenhouse Gas Initiative, the carbon market covering much of the Northeast, but neither of the Carolinas are in regional markets. If this should happen, nuclear plants in Virginia could be more economical to run and harder to displace than nuclear plants in the Carolinas, especially if RGGI makes its carbon regulations stricter.
There are currently no planned nuclear retirements in Zone 5, but going forward there are nine nuclear plants in the area with 15.9 GWs of nameplate capacity, which are all over 30 years old. Any retirements would present a monumental opportunity for gas demand in the region. Theoretically, if those nuclear plants were to be replaced by new gas fired generation, it would create 2.2 Bcf/d of additional demand.
In summary, gas demand experienced a structural increase in Z5 over the past several years due to coal switching and more in-market generation, but future opportunities to sustain that growth are increasingly limited. New Capacity into Z5 (Atlantic Sunrise and Mountain Valley) will greatly exceed Z5 demand growth which means increasing flows into Z4 from Z5.
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