POWER May 2010 - 6

SPEAKING OF POWER
Bridge to a Dead End
T
he 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
6
also-ran in the dispatch order, again pushing
up electricity rates.
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 " gasabout
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
Carbon allowance prices will surely take
more than a decade to rise high enough to
make the fuel switch attractive.
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 CO2
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.
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
www.powermag.com
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-togas
conversion is made, that " bridge " becomes
a one-way street. ■
-Dr. Robert Peltier, PE, is POWER's
editor-in-chief.
POWER | May 2010
http://www.powermag.com
POWER May 2010

Table of Contents for the Digital Edition of POWER May 2010
