Estimating Cost of Electricity Generation by Natural Gas

The price of electricity generation using natural gas is very sensitive to the cost of the gas. In fact, the two are roughly proportional (e-mail from Amy Sweeney, EIA, 18 September 2012). To a good approximation, doubling the cost of gas doubles the cost of generation. So we need to know the ratio between gas price and generation cost.

The U.S. Energy Information Administration provides the data we need – five-year records (2006-2010). The ratio electricity/gas ratio turns out to be 10.4, using the Henry Hub gas price (named for a terminal in Louisiana) at the New York Mercantile Exchange. This ratio is good within about 25 percent, good enough to estimate how competitive wind and gas are. Recently, the Henry Hub price has been $2.75-$3.00 per million BTU, so that the generation price is around $30 per MWh. Since wind costs around $55 per MWh, it  does not appear particularly competitive. However, the volatility of gas price is an inhibitor to its use  (See my blog Wind Energy Now Competitive with Fossil Fuels dated 11 July 2012)

Note:  as of 07 Dec. 2012, the natural gas price had risen to $3.60, making electricity generation from it cost around $38; still not enough to make wind less costly, but getting   there. 

Update of Wind Power and Electric Rates

Wind Energy Does Not Increase Electric Rates

Table of Wind Power and Electric Rates

in Ten Midwest and Appalachian States

State	Wind Power, GW	Average Electric Rates, Cents/kWh
Illinois	3.055	8.65
Indiana	1.342	8.29
Iowa	4.524	7.45
Kentucky	0	7.05
Michigan	0.487	10.76
Minnesota	2.718	8.69
Missouri	0.459	8.23
Ohio	0.419	8.87
West Virginia	0.583	8.10
Wisconsin	0.636	10.24

Note: 1 GW is the power of a typical nuclear reactor

Sources: American Wind Energy Association, U.S. Wind Power Capacity Installations by State, June 2012; U.S. Energy Information Administration, Table 5.6.B, Average Retail Price of Electricity to Ultimate Customers by End-Use Sector, by State, June 2012 and 2011 (June 2012 used in table)

Natural Gas Consumption Trends

I have been under the impression that the consumption of natural gas has been rapidly expanding. The Energy Information Administration data do show a rise over the past fifteen years, but it is only a modest seven percent (about +1/2% per year). However, there has been significant change among the various uses. The amount of gas used to generate electricity has almost doubled, while residential, commercial, and industrial usages have all decreased. It is doubtful that these trends were caused by the recession, since they are found during the years before 2008 (start o0f the recession). Table 1 lists the data.

Table 1. Natural Gas consumption by

End Use. Data from EIA

(Tcf = Trillions of cubic feet)

END USE		Amount, Tcf
		1997	2007	2011
Total		20.8	21.3	22.3
Electricity		4.1	6.8	7.6
Total less Electricity		16.7	14.4	14.7
Residential		5.0	4.7	4.7
Commercial		3.2	3.0	3.2
Industrial		8.5	6.7	6.7

Two other causes of the decrease in consumption are possible – global warming, which cuts the demand for heating in the winter, and use of more energy efficient equipment. Data on individual usage gives some insight. Table 2 shows that the small decrease in overall consumption hides a large decrease by the average household. It is doubtful that this decrease would be largely due to efficiency gains. It appears that a side effect of climate change is a decrease in the demand for natural gas by a major market for its use.

TABLE 2. INDIVIDUAL RESIDENTIAL

NATURAL GAS CONSUMPTION. Data from

AGA and U.S. Census Bureau

(Mcf = thousands of cubic feet)

Year	Individual	Number
	Residential	Households
	Use, Mcf	Millions*
1996	170.5	114.1
2006	126.5	126.4
2010	122.8	130.6
Percent Change
1996-2010	-28.0%	14.5%
*1996 data interpolation of 1995 and 200