Wednesday, March 3, 2010

Gas vs. Wind in Texas

Yesterday the Wall Street Journal had a very interesting piece on the impacts of wind energy to the electricity grid and how wind generators are getting a free ride in some respects.  The story looks at Texas and how its grid operates.

The natural gas industry points out that if a gas or coal electricity producer misses its daily power generation estimates, it has to pay for backup generation. If a wind power generator falls short of daily predictions, it doesn't have to pay for backup generation.  If they miss their estimates, they skate, placing a greater burden on other producers.

This is a thorny issue for natural gas because the increase in wind-generated power has led to a direct decrease in natural gas-generated power.  As wind has increased from 2% to 6% of state power generation, gas has dropped from 46% to 42%, a 1:1 correspondence.  Ultimately, the expansion of wind in Texas displaces natural gas production rather than coal production, thus diminishing the positive environmental impact of wind.  (This impact of wind on gas consumption, specifically in Texas, has been discussed here before.)

This is pure economics.  Because coal is cheaper than gas as a fuel source, coal plants get turned on before gas plants, which end up only taking care of peak energy needs.  The decision is purely a $/ton of coal calculation and does not take into account the externalities of burning coal, from pollution to higher levels of carbon dioxide in the atmosphere.  Legislation to impose some kind of price on carbon (tax, cap and trade, cap and dividend, etc.) will change this calculation, but for now the burden falls on natural gas.


Anonymous said...

Natural gas tumbles 3,5 %. The price link between crude oil and natural gas is disappearing. The price link between natural gas and stockpile inventories is also disappearing.
Each time you announce new completions, the price of natural gas declines. Shale gas is killing the prices. How many companies will survive?

Robert Hutchinson said...

Hey, it's not MY fault!!! I'm just reporting.

You are right about the trading fundamentals. It is all driven by the perception of over-supply. It's a shame that success breeds commodity price erosion. I've noted several times in the past that I worry about the futures of the small independents tied to conventional drilling.