Natural Gas vs. Wind - Background

Natural Gas vs. Wind - Background

Cost is a major consideration when comparing different ways of generating electricity. The Data Analysis section of this posting provides a way of calculating prices of electricity generated by natural gas. In doing the calculation, it is important to recognize that there are several gas prices:

      The Wellhead price is received by the driller
      The electrical price is paid by the utility
      The price on the New York Mercantile Exchange (NYMEX) is called Henry Hub. It is useful because it is also the source offutures prices.

I am using the electrical price, unless otherwise specified. Details on the calculation of  electricity prices  from gas prices are given in the Data Analysis section below. Some examples:

In April 2012 gas was $2.79 per 1000 cubic feet. Using the relations in the Data Analysis Section below, this translates to an estimated electrical price of $42 per thousand kilowatt-hours(about the average usage for an Ohio home). The price of electricity from wind, $55 for the same amount (Ref. 1), gave gas a $13 advantage.

By February 26, 2013, the Henry Hub price had raised to $3.427 per thousand cubic feet for an electrical price of $3.77 per thousand cubic feet(over a third higher than in April 2012) and a price of generation of about $51 per thousand kilowatt-hours. Since wind is sold on long-term contracts at a fixed price, the gas advantage has been sliced to $4, about one-third of what it was less than a year earlier. In fact, Ohio State has signed a contract for wind at $46.50 per thousand kilowatt-hours (Ref. 3), escalating by two percent per year. For them wind is currently cheaper than natural gas, and will continue to be so unless the cost of natural gas rises slowly.

References

(1) U.S. DOE, Energy Efficiency & Renewable Energy: 2011  Wind Energy  Market Report: http://www1.eere.energy.gov/wind/pdfs/2011_wind_technologies_market_report.pdf

(2) WTRG Web Page:  http://www.wtrg.com/

(3) OSU to save $1 million a year by buying wind power, Columbus Dispatch, 28 Jan, 2013
Data Analysis

Relations among the Various  Gas Prices Annual data from 1997 through 2011 provided by EIA allows an estimate of the ratios of the various gas prices:

Electrical = 1.10 Henry Hub (Refs A.1 and A.3), std. dev. = 0.08
Electrical = 1.19 Wellhead (Refs. A.1 and A.4), std. dev. = 0.06

Relation between  Gas Cost  and Electricity Price The data in Table 1 comes from References A.1 and A.2. There is a close relation between gas cost and electricity-generation price:

Expressing the relation:

Electricity price = 23.2 + 6.8x(gas price) --- (Equ. A.1)

where the gas price is that paid by utilities and prices are expressed in terms used in Figure 1.

Expressing  Equ. A-1 in terms of Henry Hub spot price:

Electricity price = 23.2 + 7.5x(spot price) --- (Equ. A.2)

Table 1. Relation between Gas Cost

And Electricity Generation Cost

Year	Gas Cost, $/Mcu.ft.	Electric Price, $/MWh
1999	2.62	46
2000	4.38	56
2001	4.61	50
2002	3.68	46
2003	5.57	63
2004	6.11	58
2005	8.47	57
2006	7.11	68
2007	7.31	73
2008	9.26	86

Calculated Electricity Prices Table 2 gives an estimate of how the electricity price has changed over the past year. While the price appears to be on a plateau, futures prices suggest that this is a lull.

Table 2. Estimated Electricity Prices from Natural Gas

Date	Electrical Gas Price,$/Mcu.ft.	Electricity Price, $/Mwh,  (Eq A.1)
Apr. 2012*	2.79**	42
Jun. 2012	3.20**	45
Aug. 2012	3.59**	47
Oct. 2012	3.98**	50
Dec. 2012	4.36**	53
Feb. 2013	3.77***	49
Apr. 2013	3.84****	49
Jun. 2013	3.94****	50
Aug. 2013	4.07****	51

*     LWVO Senate testimony on 129-SB315 presented
**    Ref. A.5
***   End of Month Henry Hub spot price (Ref. A.6) + 10%
****  Henry Hub futures (Ref. A.7) + 10%


References

A.1. EIA: U.S. Natural Gas Electric Power Price (annual data): http://www.eia.gov/dnav/ng/hist/n3045us3a.htm

A.2. Brian Bush, et al., Variance Analysis of Wind and Natural Gas under Different Market Structures: some Observations, NREL Report NREL/TP-6A20-52790 (Jan.2012): http://www.nrel.gov/docs/fy12osti/52790.pdf

A.3. EIA: Henry Hub Gulf Coast Natural Gas Spot Price: http://www.eia.gov/dnav/ng/hist/rngwhhdA.htm

A.4 EIA: U.S. Natural Gas Wellhead Price: http://www.eia.gov/dnav/ng/hist/n9190us3A.htm

A.5. EIA: U.S. Natural Gas Electric Power Price (monthly data): http://www.eia.gov/dnav/ng/hist/n3045us3M.htm

A.6. (2) WTRG Web Page:  http://www.wtrg.com/

A.7   Henry Hub Natural Gas Futures: 
http://www.cmegroup.com/trading/energy/natural-gas/natural-gas.html

Renewable Energy Surcharges

There are several studies by renewable-energy opponents claiming that attaining state goals will be prohibitively expensive. While their logic is flawed, they form a serious problem in trying to save legislation here, and in other states.

To counter this, I believe that we need to document how much renewable-energy legislation is really costing. It will buttress my LWV Legislative testimony. Below are the results of a Google search . Additions and corrections – PLEASE.

Arizona (Utility companies): $2.78 & $3.15
http://www.aps.com/main/green/choice/solar/Business/installers_3.html
https://www.tep.com/news/updates/rest/

Massachusetts (State's Clean Energy Center): $0.30
http://www.masscec.com/index.cfm/page/About-MassCEC/pid/11193

Michigan (Public Service Commission Report): 0 - $3, depending on provider
http://www.michigan.gov/documents/mpsc/act_295_update_energy_fair_390176_7.pdf

New Mexico (Public Service Commission Announcement): $1.38 - $1.47
http://www.santafenewmexican.com/localnews/081512PNMrenewable#.UP_ytCdi5X8

North Carolina (Charlotte News Observer,  April 24, 2013): $0.22-0.42
Push to end NC's renewable energy program dies in committee
www.newsobserver.com

Ohio (my analysis): $0.10 - 0.25
tinyurl.com/alanpeg-1301

Texas (calculated using opponents data): $ 0.30
http://www.blogger.com/blogger.g?blogID=7807127979107675002#editor/target=post;postID=2364287535437302697http://

Virginia (Attorney General Estimate): $1.29 - $1.40
http://hamptonroads.com/2013/01/repeal-va-renewable-energy-incentives-proposed

Wisconsin (Public Service Commission Report): 1.00 – 1.09 percent
http://psc.wi.gov/pdffiles\News Releases\2012\06 June\RPS Report.pdf


Note: I have not included MD. Recent news stories on plans for offshore wind there contain the Governor's estimates of future costs, not actual costs.

Ohio Net Electricity Generation by Source

http://www.eia.gov/beta/state/?sid=OH#tabs-4

Sept. 2012 (GWh):

Coal = 5680 (63 %)

Nat. Gas = 1698 (19 %)

Nuclear = 1530 (17 %)

Renewable (non-hydro) = 113 (1.2 %)

Hydro = 31 (0.3 %)

Note that Ohio has more coal, less gas, and less renewables compared to the country as a whole.

Trends in Electricity Generation

The table below shows trends in electricity generation nationally over the last decade. The rise in usage of natural gas is the clearest trend. It also appears that this rise has eliminated rate increases (I am not sure that this is true for Ohio). As noted in the first footnote, wind and solar are still minor factors.

Year	Coal, %	Nat. Gas, %	Other, % *	Cost, cts/kWh
2002	50	18	32	N/A
2004	50	18	32	7.44
2006	49	20	31	8.90
2008	48	22	30	9.74
2010	45	24	31	9.83
2102 **	37	36	27	9.76

* Mostly hydro and nuclear; for 2012 through Oct. wind and solar represented only 6 % of electric generation

** Through Oct.

Sources:

EIA: Net Generation by Energy Source: Total (All Sectors)

http://www.eia.gov/electricity/monthly/epm_table_grapher.cfm?t=epmt_1_1

EIA:Average Retail Price of Electricity to Ultimate Customers

http://www.eia.gov/electricity/monthly/epm_table_grapher.cfm?t=epmt_5_03G

Scientific Basis for Gas-Well Setbacks

It appears that little or no scientific knowledge has been used anywhere in the country in designating setback distances for oil and gas drilling. Statutory distances are, at best, guesswork. I define scientific knowledge as articles published peer-reviewed journals and have been able to locate only two articles that shed light on the matter:

• S. G. Osborn, et al., “Methane Contamination of Drinking Water Accompanying Gas-Well Drilling and Hydraulic Fracturing” PNAS, 108 (2011) p. 8172

• L. M. McKenzie, et al., “Human Health Risk Assessment of Air Emissions from Development of Unconventional Natural Gas Resources” Sci. Total Envir., 424 (2012) p. 79

Osborne, et al. measured methane contamination of drinking-water wells near drilling operations in northern Pennsylvania. They found enhanced concentrations within 1000 feet of the drilling sites.

McKenzie, et al. measured air pollution near gas wells in Colorado. They concluded that the health risks were significantly raised within one-half mile of the wells.

While no definitive conclusions can be made on such a small body of evidence, the available results suggest setbacks of 1000 feet from water supplies and one-half mile from populated areas. However,large setbacks severely limit the number of wells drilled. Even in sparsely populated areas of eastern Ohio a half-mile setback might preclude drilling altogether.

I want to thank the following for responding to my query for sources: Julie Boyle, Elisabeth Radow, Stan Scobie, Bette Tatham, Louise Usechak, and Roberta Winters.

Cars - Efficiency of Electric vs. Gas (Revised 11/09/120

Cars are very inefficient – they wast three-quarters of the energy provided by the burning of gasoline. In turn, gasoline is a very expensive fuel. Natural gas and electricity provide the same amount of energy at about one-tenth the cost of gasoline (even before the gasoline tax is factored in).

While the electric car has problems with range and infrastructure, it certainly is an energy saver. It only uses about one-fourth of the energy of the gasoline-powered car, since electric engines are much more efficient than gasoline ones. Even when the energy used to produce the electricity is taken into account, the electric car is about thirty percent more efficient.

The electric car is also less expensive to fuel. Exact numbers are difficult to state since dealer's price varies and the price of both gasoline and electricity are difficult to predict over long periods of time. Using manufacturer's suggested retail price and current costs of gas and electricity in Central Ohio the $7,000 price difference will be made up in about 80,000 miles.



SOURCE: Data for Nissan Leaf SV and Nissan Altima 3.5 SL.

How Long Will Our Natural Gas Last ?

See Also the post for September 3, 2012

According to current estimates, the U.S. has about a one-hundred-year supply of natural gas. These estimates assume that we will keep using gas at the same level as today. However, gas consumption has been rising at the rate of about four percent annually over the past few years. If this rate persists we have only a forty-year supply (see Mathematical Derivation below). However, there is great uncertainty in this result.

Estimates of supply are notoriously uncertain. We may have more or less gas than currently thought. Also a new technology may come along to produce new supplies (just as fracking has done). More certainly, the U.S. will likely start exporting large quantities of natural gas to Europe and Asia, where prices are much higher.

The recent rise in consumption is mostly due to electric generation and this rise is likely to be sustained. Another source will be increased use of methane (natural gas) feed stock replacing oil in chemical processes. There also may be some increase in natural gas as fuel for vehicles, currently a very minor application. Countering these trends will be the lower need for heating as winters become warmer due to climate change.

In sum, there are too many uncertainties in estimates of how long our supply of natural gas will last. My inclination is to believe that a century is a gross overestimate.

Data Sources EIA Table “Natural Gas Consumption by End Use” and NaturalGas.org “Resources”

Mathematical Derivation

Let total reserves be S and current year's usage be c; with no increase there is a 100-year supply of natural gas and S/c = 100. Let consumption rise by r percent per year.. The fist year we use c, the second year we use c(1+ r), the third year we use c(1+ r)², etc. So we need the sum of the series:

c[1 + (1+ r) + (1+ r)² + . . .]

which is:

S =c [(1 + r)ⁿ -1]/[(1+ r) -1].

where n is the number of years that the reserves will last. Rearranging and solving for n gives 40 years for r = 0.04.