May 1, 2010

Bridge to a Dead End

The Brattle Group released a provocative study paper in March in which the authors postulate that using more natural gas for generating electricity could reduce our dependence on coal-fired generation and reduce carbon emissions. Also discussed is an unexpected side effect: Renewables could push natural gas plants down in the dispatch mix in the future. Just because natural gas reserves are at a record high and the price is at historic lows doesn’t mean that gas demand will increase.

Bridge Fuel to the Future

The report, “Prospects for Natural Gas Under Climate Policy Legislation,” authored by Steven H. Levine, Frank C. Graves, and Metin Celebi, examines the role that natural gas might play as a “bridge” fuel that would link today’s mix of power-generating resources to a future mix of nuclear power, coal plants with carbon capture and sequestration, and renewable energy sources. In this scenario, when the cost of carbon allowances (in a carbon-regulated economy) rises high enough, generators will migrate to the cheaper (both in carbon emissions and price) and more-plentiful natural gas, which will spur coal-to-gas plant conversions as an interim carbon reduction step until new low-carbon-technology plants can be built. For proponents of a carbon-reduced future, the price of carbon allowances determines the time it takes to cross the “bridge.”

There are two major problems with this scenario. First, the cost of allowances, the amortized capital cost of converting coal plants to burn natural gas, higher fuel costs, and fuel volatility risk will always flow to the ratepayers in terms of increased electricity prices. Proponents are quick to forget that the price of natural gas has historically been volatile and unpredictable (gas prices at the Henry Hub pushed $15/mmBtu several times in 2005; today the price is less than $4). The second problem is that plant efficiency post-fuel-switch will be much less than that of a modern combined-cycle plant (never mind the myriad technical problems to make the fuel switch and the price of lost capacity during an outage). This will push a baseload coal plant from first place to an also-ran in the dispatch order, again pushing up electricity rates.