May 1, 2010

Bridge to a Dead End

By Dr. Robert Peltier, PE

Controlling Carbon Prices

The authors, quite rightly, point out that carbon allowance prices will surely take more than a decade to rise high enough to make the fuel switch attractive, given the damping effect that rapidly rising electricity costs would have on our economy. Let’s take a quick look at the authors’ assumptions of what economic conditions must exist for fuel switching to occur.

First, compare an "inefficient" coal plant (14,000 Btu/kWh) burning coal fuel at $1.70/million Btu to an "efficient" gas-fired combined-cycle plant (7,000 Btu/kWh) firing natural gas at $6/million Btu. The "break even" point is a carbon allowance price of $10/ton. If the carbon allowance price increases, then conceptually the coal plant will move down the dispatch order but normally remain well above a gas plant. If the coal plant is "efficient" (9,000 Btu/kWh) then the break-even point climbs to $80/ton. The authors note, "Thus, coal is not thoroughly displaced by gas until CO ₂ prices are in the range of $50 – $100/ton, levels that may not be observed (per EIA forecasts) until 2030 or later." There are numerous caveats to this rather simplistic analysis, but the relative values are illustrative of the senseless economics (at least from the viewpoint of a ratepayer) even in a carbon-constrained economy.

Carbon allowance prices will surely take more than a decade to rise high enough to make the fuel switch attractive.

Renewables Continue Growth

The authors also note the importance of the latest U.S. Energy Information Administration (EIA) gas consumption trends on their analysis: "Specifically, gas-fired generation in the U.S. falls from roughly 900 billion kWh in 2008 to about 700 billion kWh in 2015, while generation from renewables increases from about 400 billion kWh to 650 billion kWh in that same period (while coal increases slightly)." This means that even if these costly gas conversions are forced by policy rather than economics, then the EIA data show that "the displacement of gas by new renewables development is the dominant effect."

This is a shocking observation by the authors. "Indeed, there is the possibility that the U.S. may experience a perverse outcome in which renewables serve to back out natural gas – fired generation rather than coal-fired generation." This situation occurs when "the development of renewable energy resources combined with the effects of energy efficiency measures may serve to crowd out natural gas – fired generation in some regions." When gas-fired plants (be they new combined-cycle plants or much less efficient gas conversion projects) are pushed down the dispatch order, then ratepayers will pay the freight in four distinct ways: for rising allowance costs, the cost of the gas conversions and new gas-fired plants that will dispatch less, the added cost of removing the same amount of carbon from gas plants rather than from coal plants (gas has about 40% of the carbon emissions of coal), and the economic costs of the tax credits and subsidies enjoyed by renewable projects.

Natural gas enjoys many advantages when used to generate electricity, but a codependency on natural gas as a "bridge fuel" is unhealthy given the fuel’s volatile price and supply history. Lower projections of the demand for natural gas for power generation make coal-to-gas conversions a poor investment given the current carbon policy proposals.

One final observation. Once a coal-to-gas conversion is made, that "bridge" becomes a one-way street.

—Dr. Robert Peltier, PE is POWER's editor-in-chief.