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Fuel for Thought: Some Questions on the Future of Gas-Fired Generation

Fortnightly Magazine - December 1999

Protocol.[Fn.23]

Gas LDCs: Still a Role?

The commercialization of DG technologies has major implications for the future of the gas LDCs. The assumption that they and the pipeline transmission companies will become merely suppliers of gas for power generation - a relatively low-margin business - is unfounded for the same reasons noted as limitations on DG market penetration. However, the still-profitable residential and commercial direct gas use markets will require major end-use technology advances to protect them against electric competition and incursions by energy service companies that will attempt to market DG and cogeneration technologies packaged with gas supplies at attractive rates. Not only are real prices of electricity supplied to these markets projected to drop more rapidly than gas prices,[Fn.24, 25] electric end-use technologies continue to improve, thanks to major R&D investments by the large electric appliance and equipment manufacturers.

The only relatively safe gas market may be space heating where, due to technology advances, gas has made a dramatic comeback. Gas also is gaining a foothold in commercial cooling and refrigeration, again on the basis of ongoing technology advances spearheaded by GRI. The prospects for a gas-fired residential heat pump developed by GRI to capture some of the year-around electric heating and cooling market are, however, uncertain because of its high first cost and limited life between overhauls.

In any event, it is interesting to see how the more than $40 billion per year of value added at the burner tip over the acquisition cost of gas is divided. Figure 1 and Table 8 show the natural gas value chain for 1997. Both primarily are based on data from EIA's "Annual Energy Outlook 1999," except for some assumptions concerning what portion of the electric generation, industrial and commercial loads is served directly by pipelines. The city gate price for gas reported in a recent EIA "Monthly Energy Review" seems high ($3.61 per Mcf in 1997) compared with the gas wellhead and import border costs reported in EIA's "Annual Energy Outlook 1999" and unduly inflates the value added by transport to the city gate.

It is apparent that supplying the industrial and large power generation markets is not very profitable. Moreover, as noted before, growing retail competition also may lower the profitability of residential and commercial markets where transportation costs inherently are high and where temperature-sensitive loads require large storage investments.

Crystal Ball Gazing:

Some Unanswered Questions

The preceding discussion raises a number of conflicting questions.

* Profit Margin. How much of the more than $40 billion of value added at the burner tip beyond the acquisition cost of gas still captured largely by gas transmission and distribution companies will be captured by energy marketers and energy service companies?

* Electrification. Will electrification and retail competition erode the value of natural gas in the residential and commercial markets?

* Fuel vs. Product. Will gas become merely a source of power for distributed and modular generation, plus what remains of central generation? On the other hand, are expectations for large market penetrations of DG technologies in the residential and commercial markets unrealistic