Understanding the 2001-2003 Boom in Natural Gas Capacity in the U.S.

Electricity SectorKelly A. Stevens

PhD CandidatePublic Administration and International Affairs

Syracuse University: Maxwell SchoolVisiting Student at Carnegie Mellon University: Engineering & Public

Policy

USAEE: Pittsburgh, PAOctober 27, 2015 1

Preview• Changes in natural gas capacity 1996-2009• Role of policy & policy evolution

• Deregulation• National Ambient Air Quality Standards (NAAQS)

• Two main models: probit (to build or not), fixed-effects (how much to build)

• Results: suspension of deregulation and anticipation of non-attainment matters

2

Motivation

020

4060

Nat

ural

Gas

1940 1950 1960 1970 1980 1990 2000 20100

2040

60O

ther

Fue

ls

1940 1950 1960 1970 1980 1990 2000 2010Initial Year of Operation

Capacity (GW) Generation (GWyear)

Year: 2009

Natural Gas

Other FuelsGW &

GW

year

3

4

Natural Gas Units

Previous Literature• Natural gas capacity boom due to: changes in

technology feasibility, fuel prices, energy demand, storage capacity, transportation infrastructure, energy & environmental policies (Joskow, 2006 & 2011; Kaplan, 2010; Levi, 2013; Rao, 2013)

• Characteristics of the firm & ownership (Rose & Joskow, 1990)

• Strong link between regulation and technology adoption & diffusion (Popp, 2010)

• Fuel switching capability post-restructuring (Knittel et al., 2015 NBER WP)

5

Research QuestionWhat is the impact of deregulation and changes in the NAAQS on the natural gas capacity boom?• Policy & policy evolution• Energy demand & fuel supply

6

Deregulation

7

• Planning: adoption of deregulation

• Implementation: electricity markets live

• Suspension: state legislation

• Electricity prices set by competition:• Spot market• Averch-

Johnson effect

8

1997 NAAQS Changes

• Ozone and PM more NAAQS more stringent• Need for cleaner

sources

Policy EvolutionYear 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

States adopt deregulationDeregulation

EPACT States adopt deregulationDeregulation Markets set up

NAANAAQS changes Ozone PM2.5

Construction Permitting OnlineConstruction

DeregulationSuspension

Markets set up

Pre-NAA

9

Method• Data: eGRID & EIA 1996-2009• Dependent variable

• Fixed-effects:

• Probit: y =

• Model:• UOA: census-based electricity “zones” (i)

• Average: 750 MW size, 240 MW ng cap• 1,170 zones

• Robust standard errors• Clustered by metropolitan area• Sensitivity testing (CA removed)• Total, New, Expanded

1 if built0 if did not build

10

𝑦 𝑖𝑡=𝛽1ln (𝑃 ¿¿ 𝑠𝑡)+𝛽2𝑝𝑜𝑝𝑖𝑡+𝛽3 𝑁𝐺𝑎𝑟𝑒𝑎𝑖𝑡+𝛃𝑅𝑠𝑡+𝛃 𝐴𝑖𝑡+𝜃1𝑡+𝜃2𝑡 2+𝛼𝑠+𝑢𝑖𝑡¿

Results:Fixed Effects

11

FEI. II. III.

Total New Expandln_p -25.13*** -19.53*** -3.33

(6.3506) (5.0844) (2.4835)pop_chng 0.129*** 0.116*** 0.0301***

(0.0321) (0.0253) (0.0081)ng_area 11.92*** 4.532* 8.119***

(2.6080) (2.1469) (1.1802)dereg_plan 8.35 8.251 -1.057

(4.7123) (4.2161) (1.3520)dereg_implemented -3.336 1.957 -3.931*

(4.5872) (3.9908) (1.8334)dereg_suspended 25.31** 24.96** 0.882

(9.1548) (8.1495) (2.5605)pre_ozone1997 25.06** 19.96** 2.382

(9.0154) (7.5991) (2.2414)pre_pm1997 24.31 20.13 3.382

(14.2327) (11.6295) (3.3438)ozone_NAA 4.891 8.032 1.142

(5.7298) (4.5810) (2.3705)pm_NAA 6.718 6.569 1.427

(6.6145) (6.4205) (2.1227)t 17.76*** 14.19*** 3.348***

(2.5911) (2.1740) (0.8297)t_sq -0.966*** -0.782*** -0.180***

(0.1333) (0.1144) (0.0425)Constant 0.596 -1.852 -0.981  (15.2964) (14.3032) (5.6932)r2 0.0557 0.0517 0.0382N 14,385 14,385 14,385Standard errors in parentheses* p<0.05, ** p<0.01, *** p<0.001italics indicate p > 0.05 when CA removed

Results: Probit

12

ProbitIV. V. VI.

Total New Expandln_p -0.271* -0.376** -0.114

(0.1227) (0.1406) (0.1751)pop_chng 0.000975*** 0.00102*** 0.000560**

(0.0001) (0.0001) (0.0002)ng_area 0.613*** 0.294*** 1.182***

(0.0540) (0.0619) (0.1000)dereg_plan 0.307 0.415* 0.0456

(0.1694) (0.2053) (0.2137)dereg_implemented -0.0405 0.0239 -0.216

(0.1774) (0.2072) (0.2289)dereg_suspended 0.717*** 0.777** 0.322

(0.2161) (0.2634) (0.2888)pre_ozone1997 0.377*** 0.321** 0.372**

(0.0877) (0.0993) (0.1285)pre_pm1997 0.214* 0.131 0.222

(0.1061) (0.1215) (0.1406)ozone_NAA 0.0524 0.12 0.029

(0.0862) (0.0888) (0.1383)pm_NAA 0.165 0.265** 0.0206

(0.0858) (0.1000) (0.1177)t 0.419*** 0.537*** 0.258***

(0.0459) (0.0585) (0.0619)t_sq -0.0257*** -0.0333*** -0.0155***

(0.0024) (0.0033) (0.0031)Constant -3.042*** -3.329*** -3.667***  (0.2352) (0.3065) (0.2918)r2N 14,022 13,910 13,469Standard errors in parentheses* p<0.05, ** p<0.01, *** p<0.001italics indicate p > 0.05 when CA removed

dy/dx  All New Expandng_area 0.0461*** 0.0148*** 0.0446***dereg_plan 0.0231 0.0209* 0.0017dereg_implemented -0.0030 0.0012 -0.0082dereg_suspended 0.0539*** 0.0392** 0.0121pre_ozone1997 0.0283*** 0.0161** 0.0140**pre_pm1997 0.0160* 0.0066 0.0084ozone_NAA 0.0039 0.0061 0.0011pm_NAA 0.0124 0.0134** 0.0008* p<0.05, ** p<0.01, *** p<0.001

Conclusion• Deregulation does not quantitatively explain the natural gas

build-out• Expectation of nonattainment small, but significant• Policy evolution important• Clean Power Plan:

• Increase utilization of this capacity• Future investment in new capacity

• Further study: focus on the role of technology

13

Contact:Kelly A. Stevenskastev01@syr.edu

14

Extra Slides

15

Census-based electricity zones

16

FE Probit Capacity   Build   dy/dxln_p -25.13*** -0.271*

(6.3506) (0.1227)

pop_chng 0.129*** 0.000975***(0.0321) (0.0001)

ng_area 11.92*** 0.613*** 0.0461***(2.6080) (0.0540)

dereg_suspended 25.31** 0.717*** 0.0539**(9.1548) (0.2161) (0.0162)

dereg_plan 8.35 0.307 0.0231197(4.7123) (0.1694) (0.0127)

dereg_implemented -3.336 -0.0405 -0.0030474(4.5872) (0.1774) (0.0134)

pre_ozone1997 25.06** 0.377*** 0.0283***(9.0154) (0.0877) (0.0067)

pre_pm1997 24.31 0.214* 0.0160*(14.2327) (0.1061) (0.0080)

ozone_NAA 4.891 0.0524 0.0039411(5.7298) (0.0862) (0.0065)

pm_NAA 6.718 0.165 0.0124481(6.6145) (0.0858) (0.0064)

t 17.76*** 0.419***(2.5911) (0.0459)

t_sq -0.966*** -0.0257***(0.1333) (0.0024)

Constant 0.596 -3.042***  (15.2964)   (0.2352)   r2 0.0557N 14,385   14,022Standard errors in parentheses

* p<0.05, ** p<0.01, *** p<0.001italics indicate p > 0.05 when CA removed

17

Census-Based Electricity Zones

18

010

020

030

040

0C

apac

ity(m

egaw

atts

)

1940 1950 1960 1970 1980 1990 2000 2010Year Online

NG CCGT Coal SteamHydro NuclearSolar & Wind

Cumulative Capacity by Technology

Year: 2009

19

Combined Cycle Gas Turbine• Cleaner

• Traditional pollutants• CO2

• Cheaper• Quicker construction• Peaking

20

Summary StatisticsVariable Obs Mean Std. Dev. Min Max

ln_ng_cap_change 15,210 0.070 0.584 -5.897 7.795ng_build 15,210 0.040 0.197 0 1

all capacity 16,380 754 1,547 0 19,702ng_cap 16,380 240 836 0 12,649

ln_p 16,366 1.671 0.428 0.263 3.302

pop_chng 15,536 44 137 -156 1,477ng_area 16,380 0.380 0.485 0 1

dereg_suspended 16,380 0.081 0.273 0 1dereg_plan 16,380 0.090 0.287 0 1

dereg_implmented 16,380 0.219 0.413 0 1

pre_ozone1997 16,380 0.086 0.280 0 1pre_pm1997 16,380 0.044 0.206 0 1ozone_NAA 16,380 0.128 0.335 0 1

pm_NAA 16,380 0.076 0.265 0 1

21

Natural Gas Overview

22

Capacity Model Results

FE ProbitI. II. III. IV. V. VI.

  All New Expand All New Expand

ln_p -25.13*** -19.53*** -3.33 -0.271* -0.376** -0.114(6.3506) (5.0844) (2.4835) (0.1227) (0.1406) (0.1751)

pop_chng 0.129*** 0.116*** 0.0301*** 0.000975*** 0.00102*** 0.000560**(0.0321) (0.0253) (0.0081) (0.0001) (0.0001) (0.0002)

ng_area 11.92*** 4.532* 8.119*** 0.613*** 0.294*** 1.182***(2.6080) (2.1469) (1.1802) (0.0540) (0.0619) (0.1000)

dereg_suspended 25.31** 24.96** 0.882 0.717*** 0.777** 0.322(9.1548) (8.1495) (2.5605) (0.2161) (0.2634) (0.2888)

dereg_plan 8.35 8.251 -1.057 0.307 0.415* 0.0456(4.7123) (4.2161) (1.3520) (0.1694) (0.2053) (0.2137)

dereg_implemented -3.336 1.957 -3.931* -0.0405 0.0239 -0.216(4.5872) (3.9908) (1.8334) (0.1774) (0.2072) (0.2289)

pre_ozone1997 25.06** 19.96** 2.382 0.377*** 0.321** 0.372**(9.0154) (7.5991) (2.2414) (0.0877) (0.0993) (0.1285)

pre_pm1997 24.31 20.13 3.382 0.214* 0.131 0.222

(14.2327) (11.6295) (3.3438) (0.1061) (0.1215) (0.1406)ozone_NAA 4.891 8.032 1.142 0.0524 0.12 0.029

(5.7298) (4.5810) (2.3705) (0.0862) (0.0888) (0.1383)pm_NAA 6.718 6.569 1.427 0.165 0.265** 0.0206

(6.6145) (6.4205) (2.1227) (0.0858) (0.1000) (0.1177)

T 17.76*** 14.19*** 3.348*** 0.419*** 0.537*** 0.258***(2.5911) (2.1740) (0.8297) (0.0459) (0.0585) (0.0619)

t_sq -0.966*** -0.782*** -0.180*** -0.0257*** -0.0333*** -0.0155***(0.1333) (0.1144) (0.0425) (0.0024) (0.0033) (0.0031)

Constant 0.596 -1.852 -0.981 -3.042*** -3.329*** -3.667***

  (15.2964) (14.3032) (5.6932) (0.2352) (0.3065) (0.2918)r2 0.0557 0.0517 0.0382N 14,385 14,385 14,385 14,022 13,910 13,469

Standard errors in parentheses* p<0.05, ** p<0.01, *** p<0.001

italics indicate p > 0.05 when CA removed

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Compare to Coal: Cleaner, Cheaper, Smaller

Pollutant% NG CC: Coal, Steam

NO2 5.19%

SO2 0.85%

CO2 28.60%

Emissions Comparison

Plant Characteristics Plant Costs (2012$)

Nominal Capacity

(MW)

Heat Rate

(Btu/kWh)

Overnight Capital Cost

($/kW)

Fixed O&M Cost

($/kW-yr)

Variable O&M Cost

($/MWh)

   CoalSingle Unit Advanced PC 650 8,800 $3,246 $37.80 $4.47

   Natural Gas

Conventional CC 620 7,050 $917 $13.17 $3.60

Cost Comparison

EIA

24

01,

000

2,00

03,

000

TWh

CC GT Coal-St D. Renew I. Renew NG Other Nuclear Oil Other

Year: 2009Actual and Potential Generation

Actual Generation Additional Potential Generation

Combined cycle plants about 30%

capacity

More coal generation than natural gas, almost enough natural gas

capacity to match coal generation

25

CC GT coal_steam

d_renew i_renew ng_other

nuke oil other

Old New

Graphs by group

2009New vs. Old Capacity

26

27

050

0010

000

1500

0(s

um) N

AA

2002 2004 2006 2008 2010year

by YearNumber of NAA Observations

28

0.2

.4.6

.81

Cap

acity

Fac

tor

2003m1 2004m1 2005m1 2006m1 2007m1 2008m1 2009m1 2010m1ym

CC GTCoal-Steam I-RenewNuclear Oil

By GroupAverage Capacity factor

CC ~30%

Nuclear ~85%

Coal – Steam ~ 60%

Intermittent renewables ~20%