ICForecast Energy Outlook: Regulatory and Fuel Production Surprises Add to Uncertainty in Power Markets

ICF International (NASDAQ:ICFI), a leading provider of consulting services and technology solutions to government and commercial clients, has released its ICForecast Energy Outlook for the first quarter of 2015. This study highlights the near-, mid- and long-term future impacts of proposed U.S. federal environment regulations, including up-to-date analysis of U.S. Environmental Protection Agency's (EPA) rules and regulation activities; gas, coal and power market prices and coal production; and renewable energy development.

Regulatory Issues: In advance of the planned implementation date of EPA's Mercury and Air Toxics Standards (MATS) rule, ICF projects 62 GW of coal generating unit retirements, including already announced plans. With the U.S. Supreme Court set to hear arguments related to the rule in early 2015, it is not yet clear whether that implementation date will change. However, EPA's restart of the Cross-State Air Pollution Rule and the march toward a final Clean Power Plan will continue to put pressure on those coal units, especially with natural gas prices expected to remain low in the near term.

Natural Gas Market: The gas market is entering the new year with decidedly bearish price signals. Mild December weather and production growth that continues to outpace demand have kept prices low. Production from the Marcellus and Utica shale plays, concentrated in Pennsylvania and Ohio, now accounts for nearly one-quarter of all U.S. gas production. Assuming normal temperatures for the remainder of winter, ICF projects a slight seasonal rise in gas prices, followed by lower prices in 2015.

Over the long term, sustained lower oil prices could have impacts on both gas production and gas market growth. Weaker oil prices will slow growth in U.S. shale oil plays, which also produce large volumes of natural gas. However, many of the new demands for natural gas, such as liquefied natural gas exports, are driven by the large price spread between gas and oil prices. Therefore, sustained low oil prices could reduce growth in demand driven by oil-gas price arbitrage. Lower oil prices are unlikely to have any effect on power sector gas demand, which remains the primary force behind long-term demand growth.

Coal Market: While coal stockpiles remain near 10-year lows, they have increased enough to avoid a shortage this winter—unless the winter proves colder than forecasted or rail delivery delays spike again. Over the next 10 years, coal consumption is expected to remain relatively flat. Coal demand will remain flat despite the expected coal retirements through 2016 as ICF expects the remaining coal plants to run at somewhat higher capacity factors. Many coal producers had hoped the export market would provide relief to the shrinking domestic demand, which has dropped nearly 200 million tons, or 20 percent, in the last four years. However, with both thermal and metallurgical coal prices at five-year lows, the export market is extremely competitive with most U.S. producers unable to compete with Colombian and South African coal into Europe.

Renewable Market: A small extension of the renewable electricity production tax credit was included in the December 2014 tax extenders package; however, it fell short of the two-year extension that wind advocates were hoping to secure. As a result, the wind industry will still face some uncertainty ahead, although renewable portfolio standards will continue to drive development opportunities in regions where wind energy is otherwise uneconomic. On the other hand, distributed solar continues to receive incremental support among ongoing evolution of that landscape.

Power Market: Gas units continue to dominate the build mix, while renewables—driven by renewable portfolio standards—pick up the slack. Wind and solar technologies will continue to dominate the renewable build mix, but low capacity factors will keep their share of total generation nearly constant through 2030, and then will slowly increase to approximately 20 percent by 2040. Coal generation will remain constant through 2020 at which point a downward trend will begin as coal loses its dominance in the generation mix. By 2030, the CO2 price will be high enough to force more coal out of the dispatch stack as gas dominates the generation mix.

"The regulatory sands continue to shift under generation owners as the planned compliance date for MATS draws closer, leaving little time to modify compliance and investment decisions," said Chris MacCracken, principal for ICF International. "Despite the continued regulatory uncertainty adding decision risk, regulation and market forces will drive new investment in gas infrastructure, coal export facilities and generation facilities over the next five years."

The ICForecast Energy Outlook addresses a number of significant issues, including:

• Regulatory: Progress of existing regulatory issues and their impact on power and fuel markets
• Natural Gas: Views on natural gas demand to 2040 and how that affects power and other markets
• Coal: Coal pricing, retirements and regulation effect on generating markets
• Renewable: Renewable energy and the effect of not having long-term energy policy certainty
• Power: Power market supply/demand trends and future pricing effects

Using a suite of proprietary analytical tools and by incorporating global expertise from all areas of the industry, ICF utilizes a fully integrated assessment of wholesale power, transmission, fuel and emissions markets in order to offer the most complete picture of the energy industry. The report offers insight into the key areas of emissions, gas, coal, renewable energy and power.

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• ICForecast Energy Outlook
• ICF Energy
• ICF Power Markets