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Fossil Fuels and Energy Policy: Understanding the New Natural Gas Economy

How gas supply and price disruptions now outweigh oil imports as the nation's real energy problem.
Fortnightly Magazine - November 15 2000

(based on the Henry Hub, La., cash market). As of October, the price ranged as high as $5.50 to $5.60 per million Btu for December 2000 and January 2001. Those levels are roughly double what they were a year ago. In fact, there is only moderate relief even as far out as the winter of 2002-2003, when these futures prices are still about $4 per million Btu. This trend is not surprising, in spite of the dramatic increase in the active gas rig count from an average of 496 in 1999, to 810 in September 2000, 4 because gas price expectations reflect the lag-time between drilling activities and actual production.

The only near-term solution to the electric power supply and price problems is more electric generating capacity. What is required is more than 100 gigawatts (GW) of gas-fired, simple- and combined-cycle combustion turbines. Merchant plant investors and other independent power producers would build these plants at strategic locations where there are constraints in grid-carrying capacity and nearby to natural gas pipelines and storage supplies. Through 2020, the EIA projects a total of about 260 GW of such new capacity, even without a decline in the more than 300 GW of coal-fired capacity and a decline of nuclear power capacity of only 40 GW. 5 The huge orders seen so far from turbine manufacturers certainly support the high expectations for this strategy.

Over the longer term, smaller natural-gas-fired distributed generation and cogeneration options (i.e., in the single-digit kilowatt to 25-MW range) are expected to make a significant contribution to solving the power reliability and price-spike problems. However, at present, they still have relatively high investment costs and are disadvantaged by delivered natural gas prices substantially higher than those paid by larger power generators. For example, according to the EIA, even in the still "normal" year 1999, residential users paid an average of $6.62 per thousand cubic feet (Mcf) and commercial users $5.27 per thousand cubic feet, vs. $2.62 for electric utilities and $3.04 per thousand cubic feet for industrial users. 6 (One Mcf corresponds to roughly 1 million Btu-actually 1.03 million Btu.)

This higher cost paid by retail gas customers could be especially problematical for early market penetration of consumer-owned generation options such as fuel cell systems and microturbine generators. 7 It seems unlikely that commercial fuel cell systems, which of necessity must include a natural gas reforming and purification step, will be available at less than $1,500 per kilowatt in the foreseeable future. Their electric efficiency, because of the reforming step, is only about 40 percent (lower heating value basis). This corresponds to a heatrate (higher heating value basis) of about 9,500 Btu per kilowatt-hour. (The lower heating value of natural gas-reflecting no condensation of the water produced during combustion-is about 90 percent of the higher heating value on which gas prices and heatrates are based.) Just the gas cost differential of $4 per thousand cubic feet would therefore translate into a power cost disadvantage of nearly 4 cents per kilowatt-hour. Microturbines, which have more attractive installed costs ($600 to $700 per