Texas Renewable Energy Costs

According to caller.com (Corpus Christi) ‘The conservative Texas Public Policy Foundation’  said that “the renewable energy credits trading program will cost Texas consumers about $70 million this year.”  If we ask how much it costs the average homeowner, we get a very different perspective. About half of the electricity costs in Texas are borne by residential customers (EIA Electric Power Monthly), lowering the $70 million to $35 million. Texas has about ten million households (U.S. Census, Quick Facts), which lowers the cost to $3.50 per year per household or about 30 cents per month. Considering the high cost of residential electric bills, this is a small fraction of the utilities’ cost of doing business

ELECTRICITY GENERATION Natural Gas vs. Wind Power

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

[7] EIA, U.S. Natural Gas Electric Power Price http://www.eia.gov/dnav/ng/hist/n3045us3M.htm

[8] Kevin Bullis, Novel Designs Are Taking Wind Powerto the Next Level,

http://www.technologyreview.com/news/510481/novel-designs-are-taking-wind-power-to-the-next-level/?utm_campaign=newsletters&utm_source=newsletter-weekly-energy&utm_medium=email&utm_content=20130211

[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

http://dealbook.nytimes.com/2013/01/30/renewable-energy-industries-push-for-new-financing-options/

[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

http://www.forbes.com/sites/peterdetwiler/2012/12/03/driven-by-oil-shale-economics-natural-gas-prices-primed-for-slow-and-steady-rise/

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.