World energy demand is exploding and the U.S. is no longer driving consumption and price. For instance, the U.S. could double the fuel efficiencies in all its cars and the amount of world oil consumption would continue to rise, says Michael W. Wise, co-chair of the Energy Practice Group with McDonald Hopkins LLC.
“Advocates exist for coal, gas, nuclear, wind, solar and many other sources of power, but the reality is that we will need all these energy sources,” Wise says. “Every year has brought new technology, changing economics and dynamic opportunities. For example, Northeast Ohio is in the running to build the first offshore wind project in North America.”
Smart Business spoke with Wise about how energy projects are driving the economy.
What is the biggest change in the energy landscape over the last five years?
Abundant cheap natural gas -— the source of this gas is in shale formations buried deep in the earth. Historically, this source of gas represented less than two percent of the total production in the United States. Today, the production percentage is approaching 30 percent. A few years ago, gigantic port terminals were being constructed and planned in order to import liquefied natural gas (LNG). Today, those terminals are being reconstructed to export that LNG.
Texas has led this effort with its Barnett Shale reservoir, which may be the largest reservoir in the United States. However, the eastern U.S. (including Pennsylvania and eastern Ohio) is now developing the Marcellus Shale reservoir and Ohio has begun to see abundant activity in its Utica Shale reservoir.
Cheap natural gas benefits our economy as it drives down the price of electricity. Old coal plants are being retired and in some cases converted to natural gas. Both these conversions and new gas-fired generation utilize more efficient turbines to provide cheaper electricity. Cheap natural gas also provides a cost break to homeowners who heat with gas and a break for large industrials that rely on gas as a component of their manufacturing.
Finally, the drilling and distribution of natural gas is revitalizing the economies of a number of states. In particular, Texas, Louisiana, Pennsylvania and Ohio are already experiencing transformational wealth accumulations.
Are there other unique ways that Ohio is positioned to capitalize on this development?
Yes, in the use of natural gas as a preferred transportation fuel. Large vehicles and some fleets have used compressed natural gas (CNG) and liquefied natural gas (LNG) as a fuel source for decades — but on a limited basis because of the volatility of pricing. With supply appearing firm for the foreseeable future, efforts are full speed to develop the CNG/ LNG potential. Just recently, GE and Chesapeake Energy announced plans to develop CNG fueling infrastructure. The utilities (Dominion and Columbia), gas marketers (IGS) and auto OEMs (Ford, Honda and Chrysler) are also active. Government is also addressing the issue as Governor John Kasich is working with the Ohio General Assembly on a series of incentives and Congress is considering adding CNG provisions to the Federal Highway Bill.
Ohio is at the crossroads of the CNG play because of the Utica and Marcellus Shale along with the existing auto supply chain infrastructure. No other state may be better able to take economic advantage of this opportunity.
What is an under-discussed component for developing a project?
For an electricity generation project, the basics have always included site control and site-related issues along with an adequate offtake or power purchase agreement. Today, many projects must also undergo sophisticated financial engineering in order to achieve financial viability. New projects often do not have adequate returns to proceed. A byproduct of cheap natural gas is a decrease in the price of base load electricity, and more expensive renewables and advanced energies like waste heat recovery and cogeneration become comparably more expensive. In a nutshell, how does $.08 power from a cogeneration project at a steel mill compete with $.05 power from a utility? Couple this with the increasing complexity of government incentives and you have a need for sophisticated professionals. Good counsel and financial advisers can help bring a project to fruition by taking advantage of tax equity, retail power pricing, complex capital leases, state and federal incentives and favorable treatment from a utility.
What is another new variable for developing energy projects in 2012?
The Investment Tax Credit has been a strong tool to finance renewable energy projects. From 2009 until the end of 2011, that program was a real game changer as a developer could choose to take a 30 percent cash grant in lieu of the credit. This allowed projects to move forward without a partner with the requisite tax appetite. With the expiration of the grant opportunity, there is once again the necessity of a tax appetite partner. This will put a premium on sophisticated financial engineering of these projects.
What is ‘hot’ in 2012?
New and converted gas fired generation. The utilities are moving into this space but a less-told story is that other types of companies are pursuing both cogen and independent power production. The goals are to take advantage of low natural gas prices, provide a long-term hedge against the return of higher electricity prices, and to also (where appropriate) provide for the steam needs of a facility.
Who is developing projects in 2012?
Homeowners are pursuing small solar and geothermal, companies are exploring wind and cogen and utilities are developing new gas fired plants and smaller renewable projects to meet their obligations under Ohio’s renewable portfolio standard. In short, anyone.
Michael W. Wise is the co-chair of the Energy Practice Group with McDonald Hopkins LLC. Reach him at (216) 430-2034 or [email protected].
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