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.