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Fuel Swap

Natural gas as a near-term CO2 mitigation strategy.

Fortnightly Magazine - April 2010

than $30 a ton would shift the dispatch decisively toward natural gas-fired generation. With a price on carbon of between $15 to $30 a ton, power from natural gas can become significantly cheaper than coal.

Environmental Considerations

Next are the environmental consequences. As a fuel, natural gas contains 40-percent less carbon than coal. 2 Once differential generation efficiencies are factored in, electricity from natural gas releases 60-percent less CO 2 than electricity does from coal.

So how much of the coal fleet could the gas fleet displace? Shutting off the U.S. coal fleet would require utilizing the entire combined-cycle fleet and increasing the operation of a portion of the less efficient gas generators to a 58-percent capacity factor. At that level, the overall capacity factor for gas would be at 72 percent, about where the coal fleet stands today.

Ramping up existing combined-cycle plants to full capacity would reduce total U.S. CO 2 emissions by 14 percent. Increasing utilization of the less efficient portions of the gas fleet up to the level required to shut off all the nation’s coal plants would reduce U.S. CO 2 emissions by a whopping 20 percent.

Because such meaningful reductions could be accomplished tomorrow, practically with the flip of a switch, they immediately call into question the ambition of current proposed regulations to seek a 17-percent reduction over 10 years.

Limitations and Uncertainties

This opportunity clearly is subject to constraints beyond the simple size and power output of the gas and coal fleet.

The first issue is gas supply. The U.S. power sector today consumes 6.6 quadrillion Btus (quads) of natural gas per year, out of a total, economy-wide gas demand of 23.3 quads per year. Fully shutting down the entire U.S. coal fleet and replacing it with gas would increase the power sector as demand by another 16 quads per year, increasing total U.S. gas demand by 71 percent.

This raises obvious questions about gas supply and price. Such questions are particularly resonant in light of the recent shale developments that have drastically increased U.S. proven gas reserves and—according to their supporters—changed the dynamics of gas exploration in ways that could affect gas price and volatility. Whether these predictions materialize or not, it’s clear that any gas-coal shift ultimately will be constrained by gas price and supply.

At a minimum, this suggests the industry might be in the midst of a transition. Prior to the 1990s, gas prices tended to correlate with oil, as one swapped out the other as a heating fuel. That relationship has broken down in recent years and it raises the question of whether a period is beginning in which the gas-oil arbitrage is replaced by a gas-coal-plus-CO 2 price arbitrage. In any event, supply constraints are no reason not to start this switch; they simply set limits on how far it’s possible to go.

A second issue involves gas and electric transmission constraints. Significant limiting factors on the ability to fully execute a coal-gas swap are the geographical distribution of gas assets and limited transmission capabilities. Those parts of the country that are