Natural Gas and Electricity Don’t Mix (Yet)

The cost of producing electricity by natural gas and coal finished 2012 in a dead heat and future cost trends are very difficult to predict. One can read the projections (not predictions) by the U.S. Energy Information Administration and find evidence that coal is disadvantaged based on the rising cost of environmental compliance but the cost of natural gas may rise faster than the price of coal giving the price nod to coal-fired electricity. How this plays out is anyone’s guess.

I suspect there are other costs that will soon be added to the gas side of the cost ledger in the next couple of years that may temper our enthusiasm for gas. Don’t get me wrong, the price remains a bargain but the cost to produce anything always seems to rise as we delve into the details. The cost of delivering natural gas is no exception.

The increased use of natural gas has magnified the conflicting business practices between the gas industry and the power industry. On May 9, 2013, the American Public Power Association (APPA) submitted testimony to the House Energy and Power Subcommittee stating the differences in operating philosophies between pipeline operators and gas-fired plant owners could affect future electric system reliability. “The shift from coal to natural gas for electric generation creates several challenges that must be addressed, including potential price volatility for utilities and their customers, inadequate pipeline capacity and storage, lack of flexibility in pipeline rate schedules to accommodate the needs of electric generation, and misalignment of, and lack of intra-day flexibility within, the gas and electric days,” APPA said in a statement for the record of the subcommittee’s May 9 hearing on grid reliability challenges.

From the pipeline operator viewpoint, the pipelines cannot be expected to “hold” fuel during periods when the gas-fired plants cycle or are do not operate based on electricity market prices unless compensated. Conversely, in New England, 80% of gas plant revenues come producing electricity in the short-term competitive market, hour-by-hour, and cannot be expected to pay for gas the plants don’t consume. John Shelk, president of the Electric Power Supply Association, sums the tension between short-term power sales and long-term gas supply contracts, “In the end, you can’t force somebody to pay for something over a longer term than the product they’re selling.” On the other hand, there’s a price to be paid when the pipeline companies are asked to “store” fuel in its pipelines for use by utilities at their leisure.

There are other complicating issues, such as, Who pays for system upgrades (pipelines and compressor stations) to provide firm gas supplies in the future? It’s difficult to provide reliable electricity when your gas is supplied on an interruptible rate. In some locales, the presence of a coal plant is sufficient backup for electric system reliability should natural gas supplies be interrupted, thereby justifying continued use of interruptible gas. What happens when that coal plant is mothballed? It’s very difficult to excise a single plant from such a complicated system of wires and pipelines without impacting production costs and system reliability.

And then there is the cost of building new pipelines and upgrading others. New England, for example, does not have sufficient pipeline capacity for its gas-fired generation, particularly on cold winter days. An economic analysis of the value of constructing new pipeline capacity does find significant system savings but the question remains—Who pays? There is little support at the state or local levels for socializing the cost among retail customers for upgrading pipeline capacity for power generators, unlike transmission system upgrades to bring renewable electricity to market.

Further complicating the tension, the agency responsible for resolving these disagreements is unclear. Some believe that resolving these differences appears to rest firmly with FERC because of its authority over electricity grid reliability although the Energy Policy Act of 2005. Others note that FERC has the authority of running the grid in a safe and reliable manner but does not have the statutory responsibility for assuring an adequate supply of fuel to plants. In the meantime, FERC has made several positive steps to resolve the communication problems between gas and electric utilities that impact system reliability. For example, in July, FERC issued a notice of proposed rulemaking, “to remove potential barriers to communication between interstate natural gas pipelines and electric transmission operators . . . “ that have caused power outages in the Northeast and contributed to the Southwest outage in Feb. 2011. The new rules will address the reluctance of the two industries to share information for “fear of violating laws, regulations, or tariffs.” It’s a good first step but much remains to be resolved.

The good news is the confirmed U.S. reserves of natural gas have never been greater and should serve fuel power generators for generations. The bad news is the price of firm deliveries to power generators will likely be much higher than now predicted.

—Dr. Robert Peltier, PE,  consulting editor