Friday, April 12, 2013

Odds and ends

Today I'm going to try to pull several bits and pieces together.  Last week I was involved in an interesting on-line discussion about the future of electricity supplies in the US.  One of the positions I took is that areas heavily dependent on coal for generation have a problem: the stuff is steadily becoming less popular politically, where "politically" means "in voters minds."  Several of the people in the discussion made the argument that essentially unlimited cheap natural gas would take up the slack for a very long time.

The EIA recently published a brief piece stating that so far in 2013, use of gas for electricity generation is down significantly from 2012 levels.  The piece attributes the decline to the rising wholesale price for natural gas.  The choice of whether to dispatch coal-fired or gas-fired generation is very sensitive to the relative prices of the fuel.  The EIA piece includes the fuel cost chart shown to the left showing that coal and natural gas prices (measured per MWh of delivered electricity) have recently begun to overlap, mostly due to increasing gas prices.

There have been a number of articles lately (for example, here) that summarize a number of trends that suggest production of gas from tight sources is going to decline, further driving up prices.  Over the last several months, a number of companies with large tight-gas holdings have written down billions of dollars in the worth of those holdings, reflecting lower estimates of the amount of gas that can be extracted, and the price of extracting it.  The number of rigs drilling in the various shale plays has been declining slowly.  Evidence for the rapid decline in production rates from shale gas wells continues to pile up.  I interpret all of this to suggest that the producers aren't making a profit at current prices, so will reduce supplies until the prices are high enough to be profitable.  It would not be surprising if there is a bankruptcy or acquisition or two somewhere down the road.

A recently published Duke University study of the effect of new EPA clean-air standards will drive a shift from coal to natural gas, even though coal may be cheaper, due to the large capital costs of complying with the standards.  Certainly there have been a lot of complaints about the cost of complying with proposed new standards for sulfur- and nitrous-oxides and fine particulates.  One of the points that I often try to make is that such impacts may not be uniform across the US.  The EPA's Cross-State Air Pollution Rule (CSAPR, currently on hold after a federal court decision) only affected states in the Eastern and Texas Interconnects; none of the Western states were affected [1].  In light of the Duke study, the threshold at which the affected generators switch from natural gas to coal may be at a higher price than considered above.

The bottom line on this is, IMO, that for some parts of the country, electricity is going to get steadily more expensive.  In particular, I look for prices in the Eastern and Texas Interconnects to rise more rapidly than prices in the Western.

[1]  There are multiple reasons for this.  One of the reasons is that western states are big on average, with (outside of California) relatively low populations.  Cross-state effects are understandably smaller.  A second reason is that some of the bigger western coal-fired plants have already improved their emission profiles.

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