Coal or Natural Gas? Pick your poison.

The grass is always greener. That’s what I thought when I read Steve Mufson’s article this week in the Washington Post, “Coal’s burnout: Have investors moved on to cleaner energy sources?”

The Energy Information Administration says 45% of U.S. electricity is generated by coal-fired power plants; About 23% is generated by natural gas while 20% is generated by nuclear plants.

Those sources provide baseload power–the minimum amount of power a utility or distribution company must have available to customers. All other sources of energy—petroleum, wind, solar, hydroelectric, and other alternatives—make up the other 12%.

There’s always energy policy that tips the scales ever so slightly in favor of one energy source over another. Factors that affect the change are usually price or impending regulation or legislation.

But if the Obama administration will in fact take a shortsighted view and pushes for more electricity to be generated by natural gas, perhaps we should explore the unintended consequences of such a policy.

The idea that natural gas is a better option than coal or nuclear or any other generation is a myth. Every generation has its negative impact.

Pick your poison.

First, the natural-gas industry could be plagued by major regulations over its controversial method of extracting natural gas from shale—hydraulic fracturing. Also known as hydrofracking, the method drills down under clean water aquifers to reach the shale which is fractured using sand, water and other undisclosed chemicals.

The Environmental Protection Agency is looking at what chemicals are injected underground and whether they contaminate drinking water. Some lawmakers want EPA to regulate hydrofracking under the Safe Drinking Water Act.

If EPA says the practice is harmful, the consequences to the natural-gas supply could be devastating. According to the Natural Gas Association and the Independent Petroleum Association of America, 95% of new wells drilled are fracking shale for natural gas. Revis James, the Electric Power Research Institute’s Washington-based manager of generation planning, has been analyzing generation and power markets for decades.

He said shale gas is “pivotal” to the natural-gas supply, and fracking is “a pretty critical technology.” So, “if there were a barrier there, that would be damaging to the natural gas industry,” James said.

One of the world’s largest reserves of natural gas is the Marcellus Shale, under New York and neighboring northeastern states.

The Marcellus Shale, one of half a dozen shale reserves in the United States, has enough natural gas to supply the entire country for more than two years. Because of the controversy about whether fracking contaminates drinking water, New York State has halted drilling.

The second consideration in picking the “poison” should be price.

The U.S. natural gas market is arguably the most volatile of all related commodities.

If past is prologue, the American electric bill could skyrocket if the administration sets a pro-natural gas policy that forces utilities to continue to switch off their coal units, prevents utilities from getting the financing for new coal plants, and forces them to turn to natural gas.

During the electric sector deregulation in the late 1990s, natural gas was seen as the fuel of choice–cheap and clean. By the end of the 1990s, 98% of new plants were generating natural gas and what a surprise, prices of the commodity started to spike.

Everyone was yanked out of that natural-gas reverie when rising demand ramped up against limited supply causing enormous price increases, higher than $6 per million cubic feet, a figure investment analysts at Deutsche Bank say, can’t happen if natural gas wants to be competitive and play a larger role in the energy portfolio long term.

“We’ve already seen this movie before…That is the notorious volatility of gas prices,” said Luke Popovich, spokesman for the National Mining Association. “Some estimates by investment banks have predicted 30%-40% of current electricity supply would be jeopardized within five years, we’re not talking 20 years.”

Meanwhile, the U.S. Energy Information Administration says the country will need to build 30 to 40 new power plants to supply the 21 gigawatts of new electricity demand expected by 2035.

Popovich said utilities simply are not getting financing for coal plants to help meet demand growth because it’s being demonized, and everyone knows the EPA is looking to regulate emissions from power plants using its contentious authority under the Clean Air Act.

Some of the same pro-natural gas rhetoric now seems eerily similar to the natural-gas fervor lingering during deregulation more than a decade ago.

James at EPRI said, natural-gas prices have always been “more volatile,” than any other commodity prices.

Also, if more electric generation is derived from natural gas, expect utilities to have to adjust, make infrastructure investments so the natural-gas market can handle the enormous baseload power demand.

James said the natural-gas infrastructure is designed to handle a certain pressure and flow rate that accommodates the current “nonenergy” purposes–water heaters and industrial uses–and electricity delivery. Any more pressure on the pipeline for electricity generation would require utilities to make an investment, he said.

“The system is optimized for those uses,” James said.  “Let’s imagine we have a situation that instead of 20%, 40% of electricity were produced by gas…I don’t think it’s technically possible…It might require some added investment in the pipeline system.”

A final consideration of the administration might be that using more natural gas for electricity will not necessarily mitigate climate change.

While the U.S. may be retiring coal plants and regulating emissions from the ones that do run, countries like China and India are building coal plants and buying some U.S. coal to run them. 
Popovich argues that in this way we’re not saving the environment. Instead we’re unwisely killing the U.S.coal industry, killing jobs in an already tough job market, and turning our backs on what the administration had initially advocated—an energy sector driven by domestic sources of energy.

All of this, James said, “presents a combination of uncertainties against which a utility company has to plan.”

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Comments
3 Responses to “Coal or Natural Gas? Pick your poison.”
  1. Steve Ellis says:

    You’re right. There’s no free lunch. They all have their drawbacks…

  2. Alan Kovski says:

    You’re exactly right about this. It is basic economics for commodity markets that if a lot of extra demand is dumped on a commodity, the price of that commodity is driven up. A big shift of energy demand away from coal to natural gas is guaranteed to drive the gas price way up. That will be economically destructive — directly destructive through its impact on the prices of electricity, home heating and cooking gas, and indirectly destructive through its impact on the economy and on energy-intensive industries such as steel, aluminum, agriculture, chemicals, etc.

  3. Jay Herring says:

    Great post. I agree 100%.

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