Friday, August 21, 2009

Gas and Wind

Sounds like part of a bad flatulence joke, but joining the Green Team with alternative energy represents a huge opportunity for natural gas. But, as pointed out in a recent article by the Wall Street Journal, there is the potential that as more wind power capacity is built out, it will cut into gas power generation opportunities.

The article cites a very interesting report by investment banking firm Tudor Pickering and Holt that focuses on wind power in Texas. The report is a good read , and it helps laypeople like me understand the mechanics of incorporating wind power into the electricity grid (it's in presentation format but it actually is approachable and reads well -if you don't think stock analysts have a sense of humor check out the icon for nuclear power on page 9).

The conclusion of the report is a little scary for gas fans. The bottom line is that wind powered generation is going to cut into gas powered generation rather significantly. The report assumes wind would replace gas 75% of the time, which could lead to a reduction of between 0.5 and 0.6 Bcf/day of natural gas use in the state of Texas. Currently the state uses around 3.2 Bcf/day, a figure expected to rise to 3.3 Bcf/day over the next few years, so that would be a big drop.

One thing to remember, however, is that the report was written based on the current economics for power generation. In other words, there is no economic cost for externalities like pollution or carbon generation.

Two pie charts from the TPH report, shown below, jumped out at me. They show that natural gas represents 65% of the installed capacity in Texas, but in 2008 it only generated 43% of the state's energy (ERCOT stands for Electric Reliability Council of Texas, which is the name of the electricity grid that covers most of the state). Coal, which represents 16% of the installed capacity, generated 37% of the state's electricity. The bar chart below shows that Texas is "gassy" compared to the rest of the country, but there is still more natural gas installed capacity than coal installed capacity in the U.S. (around 40% for natgas vs. 30% for coal). Clearly, the U.S. has unused natural gas power generating capacity. It would cost very little to start burning more gas and less coal. We wouldn't have to build new plants as the coal lobby suggests.

The reason utilities mostly favor coal over gas is because of current economics. The "supply stack" graph below for Texas in the summer of 2008 illustrates the cost comparison. The utility is going to run the fuel that costs it the least, and natural gas is square in the middle. Interestingly, it is snuggled between the minimum and maximum summer loads, so it is the go-to fuel when the air conditioners go on. If the wind is not blowing, the whole graph shifts to the left and gas gets a lot more use. If wind generation increases dramatically, the graph shifts to the right and natgas is the odd man out.

But as I noted above, all of this is conditioned upon the current pricing model for legacy fuels. Many, including myself, argue that the real cost of burning coal is significantly higher because of the impacts it causes throughout its life cycle, from the damage caused by mining the stuff to the high levels of pollution and carbon emitted when it is burned. While the real costs of coal will never truly be incorporated in the commodity's price, the new energy legislation might begin the process by putting a cost on carbon (what they really need to do is to put a cost on mercury, NOx and SOx emissions!). If the cost of coal is increased to account for at least some of the externalities, coal and natgas easily could switch positions on the "supply stack" above.

I realize that the two fuels are functionally different and often serve different uses for utilities. For instance, because natgas plants can start up quickly they will always be favored for peak demand. But I don't think wind will spell doom for gas just yet. Ultimately the real contest is still gas vs. coal.

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