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Since the publication of my natural gas book (1987), many changes have taken place in this market. Globally, the growth in the demand for gas may still exceed that of all energy media except renewables, and until recently gas was often highly recommended as an input for electric power generation. (In both the U.S. and UK, a gigantic infusion of gas-based equipment was planned before the authentic supply-demand situation for gas was identified.) A main reason for the popularity of gas was the advent of combined cycle gas burning equipment with a very high efficiency. What happens here is that in addition to the gas turbine, there is a secondary turbine producing steam from the waste gases/heat of the gas turbine. The kinetic energy in this steam is transformed to mechanical energy that turns a generator. When compared with earlier equipment, additional electricity could be produced for a given input of gas.
However, as often happens, there are very many misconceptions in circulation about natural gas, the most pernicious of which – at least in Europe – have to do with the restructuring (i.e. deregulation/liberalization) of gas markets. Some question needs to be asked as to why and how these misconceptions came into existence, and it appears that the answer has to do with the inability of consumers and to a certain extent producers to judge the future availability of gas. For instance, one of the arguments for deregulation turned on the crank belief that more ‘competition’ – to include a greater resort to spot markets and derivatives (i.e. futures and options) – could compensate for the unavoidable depletion of physical resources.
In addition, in some parts of the world, gas producers expressed themselves in such a way as to give the impression that there was virtually an infinite amount of natural gas reserves (in one form or another) that would eventually be available for exploitation, if their transactions were not disturbed by ‘regulators’. Similarly, many gas buyers were almost totally unaware of how supply and demand could develop in the long-run, and instead continued to make plans for a future in which they would have access to all the gas that they would need, at prices that resembled those of the recent past. This might be a good place to note that in Brazil, some starry-eyed deregulators counted on gas-based electric power being cheaper than hydroelectricity and nuclear. As they now admit, this incredibly gauche supposition was completely wrong.
In much of North America, despite propaganda to the contrary, exploration and production have been yielding disappointing results for a long time, and expectations about e.g. the Gulf of Mexico and imports into the U.S. by pipeline from Canada often have an air of unreality about them. In Europe a more rational tale can be deduced on the basis of what happened in Finland. With copious potential gas supplies adjacent to Finland in Russia and Norway, the decision-makers in that country chose nuclear as the best option for additional power. They understood that given the likely future demand for gas in Europe, Asia and North America, in the long-run they might have found themselves relying on imports from very distant sources – e.g, Qatar and Iran.
According to the International Energy Agency (IEA) of the OECD, fossil fuels will account for 90% of the world primary energy mix by 2020. Global gas demand is expected to rise by 2.5-2.7%/y (although in the U.S. this figure will be 2%/y), even though the price has started moving up rapidly. The big consuming area will likely be Asia, where it has been suggested that demand will increase by an average of 3.5%/y between 2001 and 2025. The share of gas in world energy demand could move in that period from 21% to at least 24%. An earlier estimate had the average global gas production increasing by 2.75%/y until at least 2025, and gas quickly overtaking coal in the global energy picture. This no longer sounds right, nor does an absurd forecast the IEA which envisaged the global consumption of oil in 2030 reaching 120mb/d.
World gas prices might already be on an unambiguous upward trend. In picturing world gas prices remaining flat until 2005, the IEA was clearly mistaken, but they are correct in noting that a tightening of U.S. and Canadian gas supplies is unavoidable, and this process could turn out to be very unpleasant for buyers. A wellhead price of $2.5/mBtu (in 1997 prices) for purely conventional U.S. gas in 2020 seemed offbeat to me when it was predicted at the beginning of this century, and unless the global macroeconomy greatly deteriorates, a sustainable gas price of at least $10/Mcf could be experienced before the end of this year, with occasional ‘spikes’ that carried the price well above that figure. Bargain basement oil has gone out of style, and the same is going to happen with gas.
As I explain in my new textbook (2007), if recent changes in the price of gas continue, they will soon restore gas to the position in the electric generation ‘merit order’ that it occupied before the introduction of combined-cycle technology. In case readers are a bit vague on this subject, what this means is that gas will be judged as economically unsuitable for carrying the electric base load, and as a result the many investments made earlier on the basis of a low expected price of gas were ‘sub-optimal’.
IN THE MOOD FOR MISUNDERSTANDINGS
That brings us to restructuring. The IEA mostly got it wrong on restructuring in the electricity sector, and as a result I see no reason to expect an improvement in their ability to analyse the economics of world gas. However, since even the experts of the IEA are capable of comprehending that major uncertainties exist about the ability to develop and transport the more distant gas reserves, then it might be appropriate to suggest that considerable effort should be made to prevent the cavalcade of unsound ideas about deregulation/liberalisation from getting in the way of sound engineering and managerial practices. I think it useful to stress that the same exaggerated claims made for electric deregulation have also been made for gas, though not so aggressively as a decade ago. The term “exaggerated” may also apply to the future of liquefied natural gas (LNG). In the U.S. the only place that LNG has been declared welcome is on the Gulf coast – although a friendly reception is no longer certain in e.g. Louisiana. In the Northeast and on the West Coast, pipeline gas is preferred – although where this pipeline gas will originate is something that nobody seems to know.
A main shortcoming of the gas market debate was, initially, the presence of several academic economists without the slightest feel for either the economics or the engineering aspects of the natural gas sector. This includes economists with a modicum of engineering training in their background. The question was therefore raised as to how we should treat the avalanche of misjudgements about this market in order to help prevent expensive, irreversible investments from taking place.
In my new textbook, I did not treat them at all, because I presumed – perhaps incorrectly – that the lack of availability of gas would soon be revealed by its increased price; and unlike the electric deregulation travesty, gas deregulation was a blunder that was never able to get up full steam. One of the reasons for this was that in the U.S., and perhaps elsewhere, some important politicians and industry people, as well as genuine experts from the academic world, took issue with the more bizarre gas deregulation objectives. For instance, they pointed out that the natural gas market in the U.S. is not informationally efficient, which means that gas prices at widely separate localities do not follow each other in a manner which makes it possible to conclude that – when transportation costs are taken into consideration – these venues are in one market. Accordingly, the kind of arbitrage cannot take place which allows consumers faced with high prices to gain by buying elsewhere at lower prices. And not just in the U.S. A former CEO of British Gas went so far as to contend that the “half-baked fracturing” of the gas markets in order to bring about competition is essentially counter-productive. I can add that prospects for an ‘efficient’ global gas market featuring increased spot sales is as much a delusion today as when first touted .
Probably the most important observation on the ambitions of natural gas deregulators was rendered by Professor David Teece of the University of California (1990). According to him, market liberalization in the U.S. has already “jeopardized long-term supply security and created certain inefficiencies.” He also notes that “While more flexible, a series of end-to-end, short-term contracts are not a substitute for vertical integration, since the incentives of the parties are different and contract terms can be renegotiated at the time of contract renewable. There is no guarantee that contracting parties will be dealing with each other over the long term, and that specialized irreversible investments can be efficiently and competitively utilized.”
For this reason I never miss an opportunity to remind my students that as far as I am concerned, large and complex gas systems operating in a climate of uncertainty are most efficiently run on an integrated basis that emphasises long-term contracting. This kind of arrangement promotes optimally dimensioned installations, and although it may not be mentioned in your economics textbook, if pipeline-compressor-processing systems which fully exploit increasing returns to scale in order to obtain minimum costs are to be readily financed and expediently constructed, then – as I interpret the evidence – the kind of uncertainties associated with short to medium term arrangements should be kept to a minimum. Failing to do so could cause a reduction in physical investment, and in the long run lead to higher rather than lower prices.
I find it enormously satisfying to note that the majority of energy professionals are coming to their senses where the topics in this paper are concerned, and as icing on the cake, considerably less tolerance is being shown the ravings of flat-earth economists and their adherents where future supplies of gas and oil are concerned. What is happening is that these ladies and gentlemen have started paying closer attention to reality than to the kind of bizarre economic theory that became popular in the U.S. when Professor Milton Friedman proclaimed that the oil price would descend to $5/b. The domestic U.S. gas output has peaked, and more alarmingly the gas rig count in that country also appears to have peaked. This suggests that more than a few important firms now regard North America a hopeless case for large scale investment in the gas sector, even with rising gas prices. Furthermore, as in the U.S., increased drilling in Canada is not raising production by a substantial amount. The situation in both countries can easily be summed up as follows: mature basins, smaller discoveries, and a high rate of natural decline from existing gas wells – which unavoidably translates into higher energy costs if the desire is to increase or even to main output.
In selling electricity and gas deregulation to the voters, among the pseudo-scientific arguments first employed were that increasing returns to scale were a thing of the past. A competent teacher of economics or engineering should be able to expose this myth in a half-hour by employing some secondary-school algebra. Moreover, once increasing returns to scale (or sub-additivity) are recognized, then it should be easy to confirm that any benefits theoretically gained due to competition could be lost. The easiest way to handle this issue though is to ask managers and engineers in the gas (and electricity) industries whether they believe in the non-existence of increasing returns to scale.
CONCLUSIONS
In closing I want to emphasize that until recently there were any number of journalists, academics and assorted paid and unpaid propagandists prepared to inform everyone in their ‘network’ that the high oil and gas prices that have started to appear were irrelevant from a macroeconomic and financial market point of view. Their amateur arguments often claimed that today’s economies are so sophisticated when it comes to energy saving and substitution, that even with oil prices around $100/b, and gas prices that might approach that level, there is no threat to macroeconomic stability.
Since we may encounter this kind of lopsided wisdom arguments again some day, I hope that readers of this paper make it their business to tune out at the first opportunity. In a recent conference of EU movers-and-shakers, it was proposed that the EU countries should formulate a joint strategy for dealing with their energy vulnerabilities, and while I can sympathise with this goal to a certain extent, I fail to see how it conforms with the deregulation nonsense sponsored by the EU Energy Directorate. The commander of the EU Energy Army is a man who believes that ‘peak oil’ (and probably gas) is only a theory, and whose ideas about electric and gas deregulation belong in cloud-cookoo land. He and his colleagues are completely oblivious of what is taking place in real world markets as opposed to those in the fantasy worlds of their advisors and experts. Accordingly, I think that we would all be much better off if we ignore his precious intentions until he absorbs the lessons of economic history and economic theory.
Unless I am mistaken, there are influential persons in Europe and the U.S. who still believe that various deregulatory deficiencies can be ameliorated by greatly ‘thickening’ gas and electricity networks – i.e. thickening them with more pipes and wires. They certainly could be correct, although I suspect that spending serious money in order to facilitate the smooth operation of spot and derivatives markets is at best illogical and a drastic economic mistake. I also have some reservations about the use of the term contestability, and particularly how it was employed by a gentleman in Hong Kong during one of my unfriendly lectures on the subject of electric deregulation. This is a valid and important concept, but for the most part is applicable to activities in which there are low sunk costs. As bad luck would have it though, there are very high sunk costs associated with natural gas networks, and so would-be ‘players’ who enter that particular world thinking that they will gain a reputation for analytical excellence should make sure that there are no gaps in their knowledge of Microeconomics 101.
Finally, what mostly characterizes gas and electricity restructuring up to now is a reduction in economies of scale (due to sub-optimal investment strategies), increased prices, decreased reliability, and perhaps a threat to the security of supply – and all or some of these inexplicable shortcomings are visible in virtually every corner of the globe and as yet show no sign of disappearing..
REFERENCES
Banks, Ferdinand E. (2007). The Political Economy of World Energy: An
Introductory Textbook. London, Singapore and New York: World Scientific.
______ ´(1987) The Political Economy of Natural Gas. London and Sydney:
Croom Helm.
Chew, Ken (2003). ‘The world’s gas resources’. Petroleum Economist.
Darley, Julian (2004). High Noon for Natural gas. London: Chelsea Green.
Lorec, Phillipe et Fabrice Noilhan (2006).’ La stratégie gasière de la Russie et L’Union
Européenne’. Géoéconomie (No 38).
Teece, David J. (1990). ‘Structure and organization in the natural gas industry’.
The Energy Journal. 11(3):1-35.
For information on purchasing reprints of this article, contact sales. Copyright 2013 CyberTech, Inc.
It's really difficult (for me at least) to decide what position to take ref. eg. Peak Oil, Peak Gas etc. On forums like theOilDrum.com, one can read very well-reasoned and documented papers quoting groups of insiders worldwide who make an excellent case that world peak production of oil has to be happening "now or very soon", based on eg. a total world recoverable resource of about 2000 trillion bbl, with about half already used. Then I go to an EIA (or any other official government) website and see them putting up graphs and projections of there being at least three times that total, with no cause for concern.
Either a lot of apparently very knowledgeable engineers and other insiders are completely off the mark, or governments are deliberately lying to us. Agreed?
Joseph Somsel 4.23.08
The historical record in the US does offer some support for deregulation. During the Carter years, the continued regulation of well head prices caused a shortage of natural gas. This was so severe that Congress had to prohibit gas from making electricity.
Deregulation allowed prices to reflect production costs so gas became abundant, albeit at a higher cost. The prohibition on electric use was repealed. Consequently, gas use for electricity soared, especially as it was considered the lesser of many evils by the environmentalists, making it the least painful for politicians like Al Gore, who actively supported gas-fired generation.
So maybe deregulation can be better than regulation done poorly.
As I write today, the Henry Hub price was $10.60/mmBTU. (http://www.oilnergy.com/1gnymex.htm). In an earlier article here on EP, I estimated that nuclear was a cheaper source of electricity than LNG at about $7/mmBTU gas. Of course, the situation is fluid and that analysis may need updating.
A big question about LNG is how will the market find itself structured? Will the producers prefer to sell into a spot market or will long-term contracts between producers, shippers, and users be preferred? I fear that the spot market will prevail adding volatility to LNG prices and disrupting electrical generation planning in the end-user countried.
I would like to add that California LOVES LNG! Of course, not in our backyards! Our terminal for future imports of Siberian LNG is located across the border in Mexico and all our electrical planning points to gas-fired generation.
Ferdinand E. Banks 4.23.08
That's right Len, they are lying. Exactly how it works though I'm not sure, but I think that the basic concept behind these lies is to convince the OPEC people that there is so much oil in the crust of the earth - both conventional and unconventional - that they should sell their oil now instead of keeping it until later when they think that the price might be higher, although in reality it could (or will)probably be lower. Of course, I might be wrong about that - instead of lies we might be dealing with stupidity or incompetence. The government gas forecasters came out with some forecasts about twenty years ago that were absurd, the purpose being to convince the TV audience that if regulation was abandoned, there would be a huge amount of cheap gas available.
Joseph, where gas deregulation is concerned I initially got my distaste from a book written by a gentleman at the University of California (Irvine) - DeVany I think is his name - and another academic named W.David Walls, who might have worked in Hong Kong when I worked there, and also worked at Northrup, in Hawthorne (LA), where I worked for a short while. Anyway this is probably the most scholarly book ever written on gas deregulation, and they got everything wrong - and I do mean everything. Also, one of my favorite presidents - Dwight Eisenhower - was against deregulation because he said it would inconvenience poor people who had to have it for things like heating and cooking.
I'm surprised though that the intention is to continue to use very large amounts of gas for carrying the electricity base load. The gas price could be $12/mBtu by the end of this year. Also, the spot pricing of gas sounds nutty to me for other than marginal amounts.
Bob Amorosi 4.23.08
Fred,
Nice to see another fascinating and sobering article, and hear your email voice on this website again.
A retired mechanical engineering friend of mine worked for a Siemens Corp. division in Hamilton Ontario (formerly Westinghouse Canada) designing and building these huge NG turbine engines for electricity generators. They sold them to many cities in the US and South America until recently, competing directly with nuclear. Just to hear his stories of their state-of-the-art turbine technology was amazing as these monsters got bigger and bigger every year (e.g. their gas intake pipes were several inches in diameter and carried NG at 600 pounds per square inch pressure).
Apparently these machines were much faster and less costly to build than nuclear. Many must have just assumed the price of NG and its supply was not headed for a crisis soon as oil is now. I wonder if lies from authorities had anything to do with it.
Ferdinand E. Banks 4.24.08
Bob
You have touched on this business of the 'merit order', in which - in the old days - the capital cost of gas based equipment was low relative to nuclear and coal, but the price of natural gas was high, and so gas was primarily used to carry the peak load.
And then combined cycle equipment became popular, and even if gas prices had remained high (which they didn't), it would have paid to use gas based facilities for other than the peak load. Peope like myself had to shut up with our talk about the merit order.
But now the gas price is on its way up, and it might go up very fast. So...the old merit order should be restored. The interesting thing for me though was the assumption that those gas prices would remain low, and so gas based equipment was bought instead of something else. Moreover, in this matter of where the gas price is going, the 'spread' between the $/Btu price of oil and gas is probably much too wide, and will be closed to a certain extent. I've heard it said that it will be closed by the price of oil falling, but I prefer to believe that it will be the price of oil increasing.
Fred
Len Gould 4.24.08
" The prohibition on electric use was repealed. " -- Simply evidence of ANOTHER stupidity of neo-con "economics" designed for the mass TV audience and know-nothing politicians too busy wooing votes to know anything.
Len Gould 4.24.08
"I'll have time to study issues when I retire. Right now I have an election to win."
Joseph Somsel 4.24.08
Here's some backgound from EIA on the Power Plant and Industrial Fuel Act of 1978 and its repeal in 1987:
I wonder if some of these issues are worth studying, Len. Your comment about a scramble for energy resources in twenty years and what that could mean is the thing to focus on. It goes into the conclusion of my Paris talk next month so that our French friends can think about the part they they are going to play in this...imbroglio.
Fred
Gerard Havasy 4.29.08
In the late 1980s, many American utilities I worked with were pushing for a diversity of power sources to avoid dependence on any one fuel. Then the wheels came off that car in the late 1990s with the gas bubble. And it appears we are going to chase another mini-gas bubble in the next year or two pushing us on a bent of gas for nearly 20 years.
China is building a coal plant a week. We shouldn't forget our lessons of history and how quickly the price of any fuel can escalate out of sight.
If we don't get a coherent energy policy in place, using our own resources soon, then shame on us!
Ron Rebenitsch 4.29.08
After 32 years as a utility engineer building large and small power projects, i've come to appreciate the long range value and efficiency of the vertically integrated energy company. In the 90s, shortly after receiving my MBA, I embraced the "competition" theory after observing the benefits accruing to other de-regulated industries. Ultimately, however, I came to recognize that de-regulation in the electric industry meant "next quarter" equipment decisions, inadequate maintenance, short-sighted investment, higher risk with the requisite higher rates of return, and higher financing costs over shorter equipment lives. The herd mentality move to gas resulted in cheaper capital projects, but high operating costs and ultimately higher costs to the consumer. In the interest of brevity (probably too late for that) I offer just one example of simple math --- While a utility may seek a 10-12% return on investment, an independent power producer needs 15-20% return, not to mention a shorter life to recover that investment, plus the increased finance costs reflecting the risk of an unregulated environment. The higher rates of return for the investors and financial community have not been adequately offset by more efficient utilization of resources or economy of scale.
The lesson for our policy makers is simple - The theories that brought successful deregulation to some industries are not necessarily applicable to other industries. Be careful about inducing shock waves to any industry that is capital intensive and needs to make decisions on a long term 20-40 year basis. The decisions made in the electric industry today will be with us for a long time, not just through the next election.
Ferdinand E. Banks 4.30.08
Thanks for those comments Gerard and Ron - I just hope that the right people see them. This business about a coherent energy policy is a very serious necessity, and again I hope that the right people are thinking about what that means. I'm an optimist here though. Messrs Bush and Cheney had some reasonable ideas where energy is concerned, but they were distracted by other things, and all the present presidential candidates appear interested in action as compared to words, now that gasoline prices are escalating.
Your comment Gerard reminds me of comments after a talk that I gave at the Hong Kong Institution of Engineers in 2001. As somebody there said, engineers can only shake their head when they hear economists running off at the mouth about electric deregulation. Your mention of capital intensity was also appropriate. I started my 'tour' in Hong Kong with a talk to economics teachers from most of the universities in that city, and they seemed to believe that there was no difference between regulating/deregulating a capital intensive industry like electric generation and one having to do with designer clothes. I hope that I remember to reread and quote your comment later this year.
Fred
Jack Ellis 4.30.08
To Ron's points (and some of Fred's), I have to respectfully disagree with their assessments of the value of centralized, "integrated" planning. Exhibit 1 is the large, expensive holes, the cost of which is still being borne by customers, where canceled nuclear plants were once expected to be completed. Exhibit 2 is the rush by utilities to build more wires rather than focusing on supply close to load, though in this case it's the Federal incentives that are partly to blame. I maintain that for its few virtues, remote supply is more expensive and less secure than generation built near load centers. Exhibit 3 is the large fleet of old, dirty, inefficient power plants that are well past their economically and operationally useful lives. Traditional ratemaking encourages these plants to be operated until they're literally falling apart. Exhibit 4, the same centralized planning mindset that favors monopoly regulation deprives consumers of the most important piece of information they need in order to determine their "optimal" energy use, which is a realistic price. If I had an air conditioner, I could buy a product that essentially shifts most of my cooling load to the off-peak periods at a cost of about $1,000/kW of shifted peak demand, vs. at least $1,400 for pumped storage and perhaps more for the emerging technologies. However as a consumer, average cost prices do not help me determine which option is better. Finally, in a centralized planning environment, consumers bear the entire risk of poor planning, investment and operational decisions. In markets, those risks are borne a little more equally. If, and certainly this is a big if, some smart folks figure out how to provide renewable energy at well below the current price of central station generation, it's going to take an entire generation of customers to pay down the cost of assets that are built under a centralized planning and pricing regime, which will undoubtedly slow the adoption of new technology. As a consumer, I'm not very comfortable with that prospect.
I'll say this. Both the markets that Fred and Ron apparently dislike and the centralized planning that I abhor are imperfect, messy and, at times, disruptive. About all we might ever be able to agree upon is that we disagree.
Ferdinand E. Banks 5.1.08
Jack, I really wonder if you don't have me mixed up with some other Fred. Frankly, I like markets when they work, and they work a large part of the time. What about when they don't work? Well, I don't really concern myself with them in those circumstances, unless they impact my lifestyle, which is why I have this 'thing' about electric deregulation.
ELECTRIC DEREGULATION HAS FAILED, IS FAILING, AND WILL FAIL JUST ABOUT EVERYWHERE! It's an unnatural process. I won't bother telling you about the situation here in Sweden, where the managers of industrial firms are cursing deregulation for threatening their profitability, but I remind this forum once more of the bad news heaped by electric deregulation on my former home state Illinois, which was brilliantly described by Kimery Vories in a letter to EnergyBiz Insider.
Centralized planning? I'm sorry, but I don't get it. I just don't see the point . People don't want it, and I dont see why it should be forced on them, and I dont see what it has to offer. But they also don't want arrangements that work to be abandoned for the kind of expensive nonsense the deregulators gave them in California and Illinois, and which they are going to get in a large part of Europe with the crazy natural gas 'restructuring' that has been proposed.
As for your statement about holes and nuclear plants, I think that maybe you wrote that before you had your morning coffee, because it doesn't make any sense to me. However, let me say that if there are holes where nuclear plants were supposed to be, those plants will eventually be constructed in those or similar holes - and I am NOT talking about global warming. I'm talking about reliable and comparatively inexpensive electricity.
Fred
Ferdinand E. Banks 5.1.08
The date of that Kimery Vories letter to EnergyBiz Insider was June 21, 2007.
Recently I've developed some sympathy for the way that Alan Greenspan comments on energy matters, but there was a time when he said that regulation could only succeed if it was backed by armed force.
Fred
Ron Rebenitsch 5.1.08
Jack; If I might respond to your points in order: Exhibit 1: Large holes. They will be filled eventually. (The reason many projects were abandoned was changing public policy.) Exhibit 2: Rush to Transmission. I wish that were happening. Insufficient transmission is being built today and we will suffer for it in time. Building generation close to load is always a logical first choice. However, what would you build close to load? Gas generation - Expensive, with no long term supply Nuclear - not near population centers. Coal - transportation is cheaper by wire than rail. Exhibit 3: Old inefficient plants: They continue to operate because they are cheaper. Exhibit 4: Replace average pricing with time-related/variable/peak pricing. I heartily agree with you. Find us customers that will accept it. (Load management programs typically struggle because of customer resistance)
One lesson I've learned in my career is that ECONOMICS DRIVES DECISIONS; and central station power is cheaper. I'm a big fan of distributed generation (DG). I've developed several small projects and am working on more. Unfortunately, DG usually can't compete with central station power, unless it has some unique circumstances that overrides the competitive advantage of central station economy of scale.
Most DG relies on natural gas. Currently natural gas is about $10/mmbtu. Coal in the Powder River Basin is about $10-$15/ton, which translates to roughly $0.75/mmbtus. On a BTU basis, gas is 10-15 times more expensive than coal. DG may be more efficient, but it's tough to beat those economics. I should note that waste heat recovery offers substantial opportunity, but even that technology is a tough sell to the industries that have it available.
You're right that decisions made today will be paid for by the next generation. That's why we need to make sure that we make the right decisions on those large investments that are the foundation of our lifestyles. Reliance on gas because the capital cost of turbines is cheaper is short-sighted. Unfortunately, that is where the industry is going today because of what I call "carbon paralysis". Long term supplies are not guaranteed and world prices of natural gas are headed to price levels much higher than US supplies.
Regarding your comment on renewables: Technology is advancing, but wind costs have doubled in cost in the last 6 years. (I'm also developing wind projects) Solar is showing future promise, but will have geographical imitations as well. Both are intermittent, but great fuel displacers. Also, they provide one more "tool in the energy toolbox".
Every technology has its own "warts" --- coal, wind, nukes, gas. The bottom line is that we will probably need all of them to sustain the enormous energy needs of this country. If we are going to supply those needs tomorrow, we need to make decisions today, based on the best information we can gather. We can't bet our future on "something will come along".
Len Gould 5.1.08
Ron: "Unfortunately, DG usually can't compete with central station power, unless it has some unique circumstances that overrides the competitive advantage of central station economy of scale. " -- that should not be true of eg. Natural Gas fueled distributed CHP. I understand that (among other technologies) GE has SOFC fuel cell technology which can run nearly forever, silently, producing electricity and heat from the gas you now burn simply to heat your hot water, or even home in northern climates. Trades each kwh of added natural gas for about 0.95 kw of electricity, and eliminates T&D losses. The cost of them is low enough that they SHOULD rapidly become the only way Natural Gas is ever used, at least by residential customers. If you calculate that out, it alone SHOULD take a huge chunk out of "large central generation", but we'll never see them as long as present regulatory regimes stand in the way, with ridiculous interconnection rules and costs, standby charges, confiscation of excess generation etc. etc.
What's needed is a genuine free market for everyone, not these dumb de-re-regulation experiments which I agree are all doomed to fail.
Joseph Somsel 5.1.08
And natural gas has no transmission or distribution losses? It sudden travels across half a continent and pops up in your home?
Of course not. The distance between sources and major markets in the US is between 1,000 and 2,000 miles. With the need for LNG, over 10% of the original product is lost in liquefaction and shipment with more losses in gasification and pipeline transmission.
As to combined heat and power, what happens when one doesn't need both juice and heat at the same time? Your new device is just a major capital investment with no return. Certainly there will be applications where it makes sense but market penetration will remain small and it won't make much difference in poliocy decisions.
I have to second Ron's comments. His intellectual path seems to parallel mine. Taken mistaken positions and having to revise them based on reality is the hard path to wisdom.
I generally agree that the balance of free market and technocratic central planning has to be determined on the ground for the specifc technology and market. Electric markets need a strong hand because the grid is so dynamically unstable and the economies of scale so strong. The natural gas markets are much more flexible and have slower response times. The production of product is also much more diffuse - no one well or set of 100 wells will influence the market in real time like a big electric generator can.
Ideology can be a good starting point in approaching a problem but the goal is a better functioning system, not the substaining or validation of the idea. Making a better system for our customers and citizens is the higher responsiblity.
Jim Beyer 5.2.08
Joseph,
I find your last comment a bit disingenuous. Yes, some losses occur with LNG imports, but losses from normal gaseous pipelines are minimal for the product delivered. They consist only of the energy input needed to maintain pipe pressure over the transmission distance.
DG's main benefit in the immediate future is not in avoided transmission losses, but in avoided grid use. 10 kW generated locally can save 10 x 100 kW-miles of transmission use or more. I don't get it how utilities demand up-front fees and connect costs because of the expensive grid they need to pay for, yet balk at a strategy that avoids the use of this expensive and hard-to-expand resource.
For DG, if you don't need heat, you vent it. Nuclear power plants do it all the time. If you don't need the power, you sell it to your neighbor. I don't see what the big deal is.
Len Gould 5.2.08
I think "a bit disingenouos" may be overly polite. Talk about ideology...
In the discussion I posted, i made some presumptions which I considered would be common knowledge: a) the efficiency of SOFC fuel cells as pure electricity generators matches of exceeds that of any gas-fueled central station. b) the excess natural gas I was proposing be used in micro-CHP equipment is already being used by central generating stations, no new gas is transported or imported. c) every site with gas service uses natural gas to heat domestic hot water (unless the site owner is completely ??), which is a large proportion of all energy requirements of any residential site.
How the heck does anyone argue that getting 95% electrical efficiency from micro-CHP units is not a whole lot better all round than "maybe 55% if you're lucky" from central stations?
Len Gould 5.2.08
Note this: An article in Reuters, Jan 17 2008. titled
Ceramic Fuel Cells [Ltd, of Australia] and Paloma Industries [of Japan] to collaborate on fuel cell CHP products for Japan
"The Japanese Government is providing strong support for fuel cells and has set targets of generating 2.2GW of power from stationary fuel cell units - equal to 2.2 million 1kW units, by 2010."
Looks like CFCL's Net-Gen unit has a lot going for it, esp. that they appear to have resolved the seals issue.
Design Highlights: Uses CFCL's latest Gennex fuel cell module for continuous grid parallel base load power High electrical efficiency Low heat output - which allows longer operation over the year For integration with a high-efficiency condensing boiler and external hot water tank Uses proven components from the Net~Gen system
Engineering Achievements: Electrical efficiency of greater than 50% Internally integrated water treatment plant and gas desulphuriser Remote operation with connection via Ethernet Improved design for easy access and maintenance of the fuel cell module European CE approval achieved in November 2007
http://www.cfcl.com.au/Net_Gen_Plus/
Roger Arnold 5.3.08
Jim,
I believe Joseph's statements about "T&D" losses for natural gas are valid. You're correct in saying that losses "consist only of the energy input needed to maintain pipe pressure over the transmission distance", but that's not a small amount. On very long pipelines, I believe, as much as 30% of the gas entering the pipeline may be consumed to power the string of pumping stations needed to maintain its flow.
There's an economic tradeoff between the size of the pipeline, the quantity of gas delivered, and pumping losses. Relative pumping losses can be reduced, in a given pipeline, by reducing the flow rate. Or, for a given required flow rate, they can be reduced by increasing the size of the pipeline. But at some point, the higher capital cost for a larger pipeline isn't worth the savings in pumping energy.
It's a curious fact that, as a result of the rapid rise in natural gas prices, most gas pipelines in use today find themselves undersized compared to what would now be optimum. If they were designed today, the tradeoff between capital cost and pumping losses would favor somewhat larger pipes with lower pumping losses.
Jim Beyer 5.3.08
Using the gas itself to power the pipeline may also be an outdated notion. If NG is too expensive to generate electricity, then perhaps the pipelines should be pressurized with grid current. It would seem you could do this in at least some parts of a pipeline.
Ferdinand E. Banks 5.3.08
I wonder, I really wonder Roger about the last paragraph in your comment. Turn that around so that natural gas prices collapsed. Then, according to my production theory, pipelines would be undersized: (ceteris paribus) more compression and larger diameters would be in order.
Roger Arnold 5.3.08
Fred, a price collaps leading to much higher consumption would certainly stress the pipeline system. That's a slightly different problem.
I'm assuming that the volume of gas available at the individual pipeline head is a given. In that case, the incremental capital expended for a larger pipeline has an incremental return of gas not consumed in pumping. If the price of gas is high, then the return on that additional capital is favorable. If the price is low, then it makes more sense to conserve on pipeline capital with a smaller pipe, and consume a bit more gas in pumping.
Not that I imagine it's usually cut that fine. There are a few standard sizes of pipes that are made, and there's little opportunity to fine tune the tradeoff between pipeline size and pumping losses.
Using utility electrical power for the pumping stations, rather than siphoning a portion of the flow, as Jim suggests, might or might not work out. There are issues of what happens if the grid goes down, and whether sufficient power is available, without running new transmission lines. A pumping station on a big pipeline probably consumes tens of megawatts. Perhaps other readers who know more about this could pitch in?
Ron Rebenitsch 5.4.08
Len; I've been tracking fuel cells for a long time. I also participate in a research initiative by the nation's electric co-ops that has put research money into beta project involving small DG and fuel cells. Given the remote nature of many of our loads, islanded DG would be a godsend to many co-ops. However, to be diplomatic, I can only say that our research and pilot project results have been mixed and we haven't yet found a way forward to widespread use.
Fuel cells are "just around the corner", where they have been for many years. My best guess on fuel cells is that the solid oxide technology may be the best techincal alternative today, but much more advancement in fuel cell technology is still needed before it becomes a widely used resource. Fuel cells offer trremendous opportunity, but they are extremely expensive and not ready for prime time, despite the popular press.
We live in a very dynamic economy. Electric regulation does not prevent anyone from generating their own electricity. If fuel cells were an economic resource, it would be already widely used, instead of a small niche that gets a lot of press.
If you can point to a readily available fuel cell technology WHERE THE ECONOMICS WORK, please do so and I will pursue it.
Todd McKissick 5.4.08
Ron, "...our research..." is the key phrase in there. It seems, to me at least, that most utility based research, government sponsored research, and non-profit funded (aka government directed) research follows the EIA's model of results supporting a pre-supposed cause.
Other arguments like "just around the corner" or 'they're coming but we can't all wait 20 years before they get here' or even your latest of "..does not prevent anyone from generating their own.." are just methods to quell the popular interest and perceived viability of the systems that are indeed out there. Sure, many aren't fully commercialized yet, but many are and are growing as well. It will be interesting to see just how long the "if [they] were an economic resource, [they] would be already widely used.." can hold out. How long did any other industry take to become mainstream? What everyone forgets is that 'renewables' aren't one technology that needs support. There are thousands of them and they each deserve the level of support and research that was given to e.g. the gas or oil industries. Right now, each is being developed by one tiny little team with comparatively miniscule budgets. Couple that with anti-renewables regulation and you've got an increasing timeframe. Even so, I think it's very disingenouos to knock them on the progress they have made so far.
As far as economies of scale relates to this, that works both ways. You can centralize all the power generated and send it everywhere cheaply every day or you can stamp out millions of mass produced little generators and simply send them everywhere once.
Todd McKissick 5.4.08
Also, how many fully selfsustained 'ecocities' have to be installed woldwide before they start to get popular press?
Len Gould 5.5.08
Ron Rebenitsch: "islanded DG would be a godsend to many co-ops." -- What minimum characteristics would you require of a DG micro-CHP technology for it to become interesting? $/kw, electrical efficiency, overall efficiency? What other limiting factors?
Jim Beyer 5.5.08
Some very rough numbers on compressor station consumption.
It looks like to raise pressure from 4.0 to 5.0 MPa, it takes 1.3 units of fuel per day compared with the daily flow rate of 450 units. This is for a compression that moves the gas about 250 miles. So that would be 0.29 percent of fuel (1.3/450) used for moving the gas 250 miles. So a 2500 mile pipeline might require 3.0% of the fuel used.
Consider this a very rough estimate perhaps within a factor of 2 of reality. It is based on numbers supplied from a Chinese natural gas pipeline study. These numbers were based on a pipeline supplying 4,500,000 meters^3 per day.
Anyway, the nominal energy losses due to piping NG seem to be quite small. Probably closer to 3% versus 30% for a 2500 mile pipeline.
This sort of all makes sense, when you consider how efficient even supertankers are at moving around oil. A fixed pipeline that just needs to overcome pressure drop is going to be very efficient.
BTW, most of the optimizing of compressor stations seems aimed more at optimal strategies based on varying demand requirements (different pressures) rather than (pure) fuel use minimization.
Jim Beyer 5.5.08
Oh, so no, you probably wouldn't power a NG compressor station externally. You use a very small amount of the product to raise the pressure and move it along.
Ron Rebenitsch 5.5.08
Len: The average retail residential rate for power in the Dakotas, Minnesota, Iowa, Wyoming, Nebraska region is about 8 cents/kwh. Retail gas is about $8-$10 per mmbtu. (recent price spikes on the main pipelines are about $10 today, without the distribution costs) Those two price factors are at odds with DG.
Numerous assumptions are needed to answer your questions, but as an example, the Capstone micro-turbine is only about 27% efficent in producing electricity from natural gas. However, using the exhaust heat can raise the total energy efficiency to 70-90%. Thus, If only the electricity is produced the fuel cost alone is about 12.5 cents/kWH. The exhaust heat must be utilized to reduce the overall cost. However, you need to have a use for that exhaust heat before it has value. The challenge is having a balance of electricity and heat needs to optimize the efficiency. Micro-CHP, such as the Honda unit offer an opportunity, but the capital cost and O&M need to be added to the fuel cost. I've found capital costs for small DG to be anywhere from $1500 to $5000 per kW of capacity. Although a typical house averages roughly 1000 kWhs/month (avg 1.4 kW), the demand varies between almost zero and 20 kW. To meet the peak demand, thus requires a large generator, or some kind of electrical storage. All of which are costly.
Jim - Most large gas pipeline bleeds gas from the pipeline to run the compressors. Usage typically varies from 2% to 6-8% It's worth noting that at today's prices, many pipelines are looking at electric drives, to replace their gas drives.
Todd - If you are aware of a technology that is cost competitive in today's market, please let me know.
I might add that I've developed several projects that used waste heat to generate several MW at a site. However, those opportunities are limited. We live in a capitalist economy - if the economics work, regulation can only slow things down - it doesn't stop it. There are too many entrepreneurs out there that will make it work. Where are the technologies that are cost competitive?
Len Gould 5.6.08
Ron: Can the small household micro-CHP be sized large enough that it is also useful as a backup power source for the homeowner? (eg. can it sell power back into the grid whenever the owner wishes, eg. perhaps 7 to 10 kw? If so, at what price?)
Jim Beyer 5.6.08
Solar Thermal and anaerobic digestion are both cost competitive, though they both need more development work. Instead, the government pays for Ethanol, PV, and clean coal, and oil leases.
Yes, it's a capitalist economy, and large corporations find that spending a small amount of money on lobbying can maintain the status quo. The economics of oil are no longer working, if you account for the time and money spent on wars needed to secure it. This is how Rome fell, by propping up the status quo despite costly externalities that did not get properly addressed.
Ron Rebenitsch 5.6.08
Len - The micro-CHP I've looked at can be used for back-up power or for islanded operation. For simple backup, the capital cost would be high and it would be cheaper to just keep a small portable generator for those rare times that backup is needed.
I think you may also be asking if it could be run at a higher level than needed, with the surplus power sold back to the utility. I would expect that most units of this type could be manually set to run at a peak level. As always, that would depend on the economics of your fuel, vs the cost of alternative electricity to the utility at the time of delivery. During peak times, it may be profitable for the homeowner to supply power. During off-peak times, the alternative costs of other power supply resources are likely to be cheaper.
The utility should pay for the power at the appropriate rate as determined by the cost of power at the time. However, it needs to be recognized that the cost of transmission and distribution is typically in the bundled rate that the residential consumer sees. In those cases, "net metering" would mean the rest of the customers are subsidising the generator. Net metering is equitable only if the rate is unbundled and the rate components are billed/reimbursed the products consumed or delivered.
Jim - I can agree that solar thermal may be cost competitive in California, where rates are extremely high and designed to encourage conservation. (again economics drives everything, including conservation) Anaerobic digestion is viable at about 6.5 cents/kWh. That was out of the money a couple years ago, but the recent rise in prices is bringing it into the market. The projects I've investigated suggest that it takes about 3,000 cows to produce one MW of power. Its a good resource, but limited.
That said, I'm expecting power costs to become very costly in the next few years if the current trend on national/state energ policies continue. High prices for power will make any number of DG technologies cost competitive. We'll need every resource we can find.
At the same time, I'm not buying into conspiracy theories about lobbying for the status quo. The electric industry has changed too much in the last 15 years (i.e., open access and the extraordinary rise in IPPs) to claim the status quo has been preserved for the benefit of the big dogs. Economics and capitalism has been at work and society is testing new models. Some work and some don't. To return to the initial catalyst for this thread, economy of scale matters and that is what remaining big dogs have leveraged via mergers.
Jim Beyer 5.7.08
Two electric power industry executives are sitting on a bench. The first says, "See that wall over there? There were two snails on that wall. I killed one of them with a rock!" The second one asks, "What happened to the other one?" The first executive responds, "Oh, he got away."
Seriously, I don't have much issue with the electric industry. I think they deal too much with the day-to-day reality of power delivery not to be enmeshed fairly well with the hard issues involved. That said, they need to move more with real-time pricing, and deal with the reality (or or otherwise) of state-driven RPS. The likely prospect of PHEVs might mean the grid will be supplying substantial portions of our transportation energy needs as well.
Maybe ethanol isn't a conspiracy, but it is incredibly stupid. Instead of corn to ethanol, we should be doing switchgrass to methane, via anaerobic digestion. Cows are great too, but as you say, they are limited. The byproduct from AD is also a nitrogen rich product, which is also of value in a world of expensive NG.
