Betting for consumers on the volatile price of natural gas
Decision makers in the regulated part of the business of producing electricity have short memories when it comes to the behavior of natural gas prices, but long memories when it comes to the potential for nuclear power plant construction costs to get out of hand.
They publicly worry about the “bet the company” proposition of building new nuclear power plants and ask for as many assurances and risk mitigations as they can get before undertaking a new nuclear plant construction project, even though nuclear plants use a fuel with a low and predictable cost. In contrast they will choose to build substantial new capacity that burns natural gas and fuel oil. They pay less attention to the long term risk of using fuels with a demonstrated history of price volatility that can double or triple a production cost component that represents between 75 and 95% of the total cost of generating electricity. In case you do not follow gas and fuel oil prices, here is a graph of the actual prices during the past 6 years.
Utility company power plant decision making can be confusing unless you know that almost every service area in the United States where electricity prices are regulated on a rate of return basis allow fuel prices as a pass through charge to consumers that can be adjusted on a frequent basis – often as often as every six months. In contrast, capital cost rate cases are infrequent, complex and often contentious with every major charge subject to detailed questioning about prudence.
If a regulated utility does a great job of building new nuclear facilities and keeps cost well under control, they end up with an asset that produces electricity at a low and predictable marginal cost. The price they are allowed to charge for the electricity is set by regulators at a rate that will enable recovery of the allowed cost plus a bureaucratically determined 8-15% return on their capital investment. The allowed electricity price has nothing to do with the prices charged by other sources of power in the marketplace. If the nuclear plant construction costs get out of control because of poor management, regulatory changes during construction, imposed legal delays, or high interest rates, the utility can end up with a large portion of the cost of the plant ineligible for cost recovery.
In contrast, a regulated utility that builds a natural gas power plant can predict the cost and schedule for plant construction with reasonable precision. At least 75% and perhaps as much as 95% of the marginal cost of producing electricity from that plant will be associated with purchasing delivered fuel. However, that cost will be passed directly to the customers, who unwittingly accept all of the volatility risk. The regulated utility will still be allowed between 8-15% return on capital investment.
Does it make you happy to find out that your utility company and your public utility regulators may have put you on the hook for natural gas price volatility during the 20-40 years that the gas plants will be operating?
Globe and Mail, 3 March 2010
ENERGY
National News
KAREN HOWLETT
[excerpted]
“TORONTO — It was a tough-talking Premier Dalton McGuinty who warned last year that he wouldn’t tolerate the
As Rod has pointed out in earlier posts, the Sierra Club in this country is in favor of natural gas instead of nukes. Nobody seems to notice that when we run out of natural gas, we lose a very valuable resource for transportation and home heating. Burning it up to make electricity is wasteful. People smile and say..well, we have 90 years supply of natural gas! First, they don’t mention they are calculating 90 years at current use rates, WHILE they are planning to greatly expand its use. Second, 90 years actually doesn’t sound that long to me, considering what a uranium/thorium energy supply can be.
Certainly there should be the same scrutiny on fuel price increases as there are for capital expenditures. Gas price volatility should be analyzed for gas turbines at the permitting stage just as capital costs are reviewed. After all, nuclear units run for at least 60 years these days and fuel price variability should be taken into account.
The World Energy Assessment, put out by the UNDP (United Nations Development Program), sets total gas reserves (“conventional” + “unconventional”) at 15,000 EJ (exajoules) compared to the year 2000 global demand of 95 EJ. This is more than 150 years worth of gas if used at year 2000 global demand rate.
The new US discoveries they use “fracking” to get at are classed as “unconventional”. Anything thought likely to be produced is classed as a reserve.
Then there is the resource, the entire amount thought to exist. The natural gas resource thought to exist by UNDP is 49,500 EJ. This is more than 3 times what is now thought to be economic to exploit. The history of the fossil fuel extraction industry is that discoveries increase the size of reserves, and more of the known resource turns into reserves as the price increases and as technology improves.
And, there are the enormous amounts of methane in gas hydrates (a.k.a. “clathrates”) and geopressurized gas. These are not classified in the UNDP assessment as either reserves or resource. According to Mark Jaccard, author of Sustainable Fossil Fuels, “some analysts believe that the technological means could be quickly developed at reasonable costs” to exploit these.
Gas hydrates are the deposits of frozen methane and ice found in permafrost and in ocean sediments. People are finding floating masses of frozen ice and methane in lakes in the far north and setting them on fire as I write this. Geopressurized gas, also called “ultra deep gas”, is gas dissolved in deep aquifers. There is thought to be 350,000 EJ of gas in hydrates, and 600,000 EJ in deep aquifers. This is 10,000 years of supply at year 2000 global demand rate.
When you hear reports of methane concentration starting to increase in the atmosphere, this is thought to be gas hydrates melting in northern permafrost. If you hear of fears among climatologists of the “clathrate gun hypothesis” where a steady rise in ocean temperature suddenly causes a massive release of methane which drives the global climate irreversibly and rapidly to a much warmer regime, the concern is over these ocean sediment deposits of natural gas. The paleoclimatologists have observed at least several tremendous and relatively rapid increases in planetary temperature in the paleo record and this is the most likely explanation.
If your perspective is that greenhouse gases are a problem, you look at civilization and the resources available to it differently. These clowns are going to find a way to get the UNDP reserves we can be sure of that. They are going to get a lot of the UNDP resource as well. And there are reports of people taking a serious look at the gas hydrates, i.e. Japan, and the US. Natural gas doesn’t look like a precious commodity.
There is so much of it that getting addicted to using it is extremely dangerous, and the addiction has already happened. There is no way civilization is going to run out of gas before it screws up the planetary system irreversibly. So from my perspective the argument isn’t use nukes because our descendants might want to use the precious gas for something else, its use nukes so that there will be some descendants.
The (rate base) system should be changed so that if utilities buid gas plants, and then there is a large increase in the price of gas, they’re slapped with imprudency charges, just like the are when nuclear construction projects go over budget. The current rules represent a large bias away from nuclear and towards gas.
Another thing I like about this post is that it clarifies the distinction between risk to the utility and risk to the ratepayer. This is a drum we need to beat often. People (the press, etc..) have been lazy about this, and have just been throwing around the word risk, i.e., that something is “financially risky” or not, without asking the necessary follow on question, “risky for whom?”. Generally, what they really mean is risky for the utility (since the article is explaining why the utilities are reluctant to build). The common reader just assumes that that means the nuclear plant will be risky for him as well, whereas a gas plant will be less risky, FOR HIM. We need to hammer this point. “Nuclear is more risky for the power company, less risky for you. Gas plants are the other way around”.
Why do you think T.B. Pickens is BIG on wind turbines? Why would a man/company that has a lock on the amount of natural gas that he does want to push wind energy?
Look at the reliability of wind.
http://www.transmission.bpa.gov/Business/Operations/Wind/baltwg.aspx
and
http://mospublic.ercot.com/ercot/jsp/frequency_control.jsp
You will note, that both of these multi-Gegawatt facilities are producing, for the last week or so, less than 10% of their nameplate capacity. That means that somewhere, a gas turbine is running so that someone does not get cold.
Now look at this link to see the problems it causes.
http://www.masterresource.org/2010/02/wind-integration-incremental-emissions-from-back-up-generation-cycling-part-v-calculator-update/
It brings to light facts that any good electric utility distribution engineer knows. You will discover that utilities are required (FERC regulation) to have 10% spinning reserve (that means moving/rotating or producing power within seconds in some areas). The unreliability of wind power means that utilities are actually forced to build gas fired generators that will never operate at peak efficiency to comply with FERC spinning reserve rules. Most coal and nuclear power plants cannot take a sudden increase in demand exceeding about 5% of their capacity. On top of that, even if they could take the surge, the greatest efficiency is at 95-100% power/load. So they do not have the extra buffer to absorb that surge. That means the most economical solution for providing backup power for wind is gas turbines. That is why TB Pickens wants Wind Power, he knows this and will make a fortune off of his NG reserves, NOT because he is an environmentalist! Furthermore you cannot (or at least should not) use CCGT (combined cycle gas turbines.) All of the hype about NG being CLEAN is based upon using CCGT, not the typical fast startup gas turbine which blows the heat up a stack.
Yes, there are ways to build clusters of wind turbines around clusters of gas turbines and a central, dedicated, CCGT or “clean” coal plant, which could pick up the load in a controlled fashion, but, all of which are very expensive. Why not just build nuclear?
Now answer the question “How much is the price of gas going to go up when all of these utilities have all of these gas turbines? And, if you heat with “inexpensive natural gas,” how much is the cost of your heating gas going to go up? How much is TB Pickens going to make?
Now add in your carbon tax or cap-n-trade penalty.
The gas companies don’t lose, the wind companies don’t lose, even the power companies don’t lose – YOU lose.
I just found out that many states have exempted the private wind power companies from being assessed penalties for non delivery of contracted electricity (typically equal to a multiple of the most expensive electricity available at the time). Which means that utilities will need extra gas turbine peaking units to keep your lights on when the wind does not blow. And or pay the atrocious spot replacement rates. At times I have seen them pay as much as $2000 per kWh (yes two thousand dollars for one kilowatt hour, an average homes daily use.)
Oh, look into how many CCGT and gas turbine peaking units they have added/built in California in the last few years.
For much of the 1990’s natural gas was MORE expensive than oil. This is hardly unusual. From 2005 to 2006, the price per BTU of natural gas and petroleum as roughly the same. The two came close again in 2009 and now gas is cheaper. The point being: Most people would realize that generating power from oil (at least as anything more than reserve or maybe peaking) is insanity. However, natural gas is not necessarily cheaper. It is sometimes, but sometimes it’s not.
The cost of gas is actually more volatile than oil year to year. It’s dramatically impacted by the severity of winter (a lot is used for heat.) It’s also impacted by international politics, the condition of pipelines and fields and by the price of oil – when oil costs go up, more heavy crude is refined and the refining process consumes enormous amounts of gas.
Aside from that, natural gas fields do get depleted, even in many cases faster than oil fields. Oil fields don’t dry up overnight – they slowly become harder to draw oil from and the production declines. With gas fields they can almost run out overnight. There’s some warning, as most have been well surveyed, but still, the idea that the supply is limitless is absolutely not true.