DRAFT
ELECTRICITY GENERATION
Natural Gas vs. Wind
Power
Al Rosenfield
20 February 2013
Ohio is
becoming an energy state to a degree unanticipated, even a few years ago.
Eastern counties are benefitting from natural gas while western counties are
benefitting from wind. For example, residents and local governments in Paulding
County (population 20,000) have already received $1.5 from the Timber Creek
Wind Farm [1]. However, questions have been raised whether their benefits are
worth the cost to all Ohio ratepayers, as required by Ohio law [2]. The answer
requires a hard look at the relative costs of generating electricity by using
natural gas and by using wind.
Only a year and
a half ago, gas was more expensive than wind [3]. But the cost of natural gas was plummeting. By
last Spring it had reached a low point and wind became more expensive than
natural gas. The difference in generating costs was about $15 to $20 per Megawatt-hour
[4,5]. While this appears to be a large cost difference, the Appendix to this
report shows that it only amounted to about 25 cents for the average Ohio household
each month. This is only about 0.2 percent of the utility’s costs to supply
that home [6].
Because of
long-term contracts, the cost of wind power hasn’t changed since last spring
(about $55 per Megawatt-hour [5]). But the price of natural gas rose by about
one-third in the remainder of 2012 [7]. The price differential between wind and
gas had shrunk to about $7 per 1000 kWh, making the cost to supply the average
household roughly 10 cents per month. This small cost disadvantage for wind may
be an exaggeration- The MIT Technology
Review recently reported that wind and gas costs are now the same [8]. Update this
paragraph when final Dec. data are in.
If the wind tax
credit had not been in effect in 2012 it would have added 2.2 cents per
kilowatt-hour to the cost of generation; the cost of providing power to Ohio
homes would have been increased by about 30 cents per month because only 1.5
percent of our electricity was generated by renewables last year. However, wind
prices appear to be fixed for the rest of this year because of the extension of
its tax credit in the ‘fiscal cliff’ legislation.
There is
concern that the future will see wind power causing large cost increases to
ratepayers. Since predictions are always imprecise, we have limited this report
to a discussion of the factors that may affect the balance between wind and
natural gas that need to be included in any prediction.
Recently news
stories have appeared that have bearing on the future of wind. In December the
American Wind Energy Association suggested willingness to accept a gradual
phase-out of the tax credit during the next five years [9]. In addition, a
campaign is underway to provide renewable energy some of the same tax breaks
that oil and gas producers receive [10].
This effort appears to have been received favorably on both sides of the
aisle in Congress [11]. Both of these plans complicate the prediction of future
wind prices.
Natural gas
prices are historically volatile. Some insight can be obtained from the futures
quotes on the New York Mercantile Exchange. These quotes represent the
consensus of the best experts on the economics of the gas industry. Currently the
natural gas futures price is increasing by about 30 cents per year over the
next three years [12]. While we are making no predictions that this rise will
actually occur, there are reasons to believe it likely. These include increased
demand due to new applications (such as motor-vehicle fuel), expanded use in
electricity generation, and limitation of supply due to increased exports [13].
In summary, the
cost difference between gas and wind is small and it is not clear which method
will be more expensive in the future. In the absence of a technological
breakthrough, we see no reason to change Ohio’s renewable-energy goals.
Appendix: How
Electricity Generation Costs
Affect Electric Bills
It is difficult
for the public to see how the electric company’s cost of generating electricity
affects them. Generating costs are given in dollars per Megawatt-hour. An
electric bill shows a cost in dollars per month.
A Megawatt-hour
is simply 1000 kilowatt-hours; to convert dollars per Megawatt-hour to dollars
per kilowatt-hour, divide by 1000. Since the electric bill shows the number of
kilowatt-hours that a home used last month, the consumer has all of the
information that he needs.
Example 1.
Household Costs
A typical Ohio
home uses about 1000 kilowatt-hours per month. In Columbus this produces a bill
of about $120 or 12 cents per kilowatt hour. Our AEP bill also shows the charge
for generation, which is about 40 percent of the total, or $48. So we are being
charged about 5 cents per kilowatt-hour for generation. The rest of the bill is
the charge for getting the electricity to our house plus taxes.
Example 2. Comparison between wind Power and Natural
Gas
Last Spring,
during the Legislative debate on an energy bill, it was pointed out that
generating electricity by using wind was more expensive than by using natural
gas. Two different estimates of the difference in generating costs at that time
were $13 and $19 per Megawatt-hour [4, 5]. Dividing by 1000, the cost
differences become 1.3 and 1.9 cents per kilowatt-hour, for an average
of 1.6 cents. According to state law the
renewable-energy goal for 2102 was 1.5 percent [2]. So the household using a
monthly total of 1000 kilowatt-hours only got 1.5 percent of that amount from
renewable energy, or 15 kilowatt-hours. At 1.6 cents per kilowatt hour, this
amounted to about 24 cents. So using renewables cost the utilities about 24
cents per household more than using gas would have. This is a tiny fraction of
the $120 electric bill that the consumer sees.
References
[1] Paulding
County Receives Payment from Wind Farms ,The
West Bend News, 31 January 2013
[2] Ohio
Revised Code, Section 4928.64(B)(2), often referred to as SB221 or 127-SB221,
the legislation that enacted this Section.
[3] NW Ohio, SE
Michigan wind power is churning up cash, ToledoBlade.com, 16 Oct. 2011, http://www.toledoblade.com/Energy/2011/10/16/Local-wind-power-is-churning-up-cash.html
[4] A.R. Rosenfield, Gas vs. Wind - I. - Current Status
http://alanpeg.blogspot.com/, 30 Jan. 2013; This blog provides a
method of estimating the cost of generating electricity using natural gas.
[5] Comment by
Sen. William Seitz, Hannah Capitol
Connection, Senate Energy and Public Utilities, SB315, 24 April 2012
[6] Columbus Dispatch 7 April 2013
[8] Kevin
Bullis, Novel Designs Are Taking Wind
Powerto the Next Level,
[9] AWEA Press
Release, Analysis: Phase-out of wind energy Production Tax Credit would enable
U.S. industry to become fully cost-competitive, December 12, 2012
[10] Felix
Morman and Dan Reicher, (Brookings Institute) INVEST BUT REFORM Smarter Finance for Cleaner Energy; Open Up Master
Limited Partnerships (MLPs)and Real Estate Investment Trusts (REITs)to
Renewable Energy http://www.brookings.edu/research/papers/2012/11/13-clean-energy-investment
[11] Diane
Cardwell, Renewable Energy Industries Push
for New Financing Options, The New York Times DealB%K January 30 2013
[12] CME Group,
Henry Hub Natural Gas Futures, http://www.cmegroup.com/trading/energy/natural-gas/natural-gas.html
[13] Peter
Kelly-Detweiler, Driven by Oil Shale
Economics, Natural Gas Prices Primed for Slow and Steady Rise, Forbes, December
3, 2012
