Archive for the ‘Electricity Generation’ category

A Crisis of Our Own Making

December 29, 2014

Increased shale gas production as well as a December that is on pace to be the ninth warmest nationally since 1950 has natural gas prices in the U.S. plummeting by 18% in the last three months. Natural gas futures for January delivery fell to $3.144 per million BTU on the New York Mercantile Exchange. These all suggest that a crisis in the New England energy market caused by natural gas price spikes will be less than many predicted this winter.

To be clear, to this point the New England energy “crisis” has largely been a winter phenomenon. The chart below shows the weighted average price of natural gas for electricity generation in New England and the U.S. It shows, natural gas prices for electricity generation are roughly the same in New England and the U.S. with the exception of the winter months, when increased demand for home heating along with the region’s increased reliance on gas-fired electricity generation combine to exceed the capacity of the limited natural gas pipelines in the region. The result is a limited supply and exceptionally high natural gas prices for power generation in the region. As the chart shows, the premium (over average U.S. prices) paid for natural gas by New England power producers has increased each of the past several winters. Abundant supplies and lower prices nationally and a winter forecast of 11% higher mean temperatures compared to the Winter of 2013-14, will lessen but not eliminate natural gas issues or the larger issue of longer-term energy production in the New England region.
Cost of nat gas for generation

The chart below graphically depicts perhaps the most fundamental problem confronting the New England energy market, one that currently prevents the region from fully realizing the benefits of our nation’s booming production of natural gas. The chart highlights the dearth of natural gas pipeline capacity in the New England region compared to most other regions, including much more sparsely populated regions of the country.

ngpipelinesThere is a reason the chart shows a concentration of pipelines in Ohio, West Virginia, Pennsylvania, and other nearby (to New England) Eastern states. These states currently produce about 40% of the nation’s shale gas but they promise to produce an even greater percentage of the nation’s gas in the future. Together, these states (along with small amounts from states near them) hold over 60% of the proved reserves of shale gas in the entire U.S. according to the U.S. Energy Information Agency. Unfortunately, the chart also shows that the increasing number of pipelines emanating from the region don’t make their way into New England. When the U.S. was more at the mercy of the exigencies of the world’s energy suppliers than it is now, New England had someone to blame for its energy disadvantages. With an emerging abundance of natural gas so close by, it is more appropriate to ask ourselves why we don’t benefit from the boom in nearby production.

shale gas productionNew England is not a region that produces its own fossil fuels but few areas of the country do and they still manage to avoid the sort energy “crises” that periodically plague New England. To the extent that there is an energy “crisis” we have nothing or no one to blame but ourselves. Natural gas is generally more expensive in New England but not always for electricity generation, except during a few months of the year when pipeline constraints are the culprit. New England is “retiring” older “base-load” power plants but so are many other regions – seven coal-fired power plants that I know of in Ohio and another five in Western Pennsylvania alone. But these are also states where new gas fired power plants or other generating facilities are being built to replace them and neither of these regions is straining their natural gas pipeline capacity by adding new, gas-fired power plants. I have done studies for three new gas-fired power plants in Ohio in recent years and although subject to just as much regulatory and public scrutiny, none of the facilities faced the kind of parochial opposition characteristic of most proposed projects in New England. I have also done work on a wind energy project in New Hampshire and it faced as much or more opposition as would any fossil fuel generating project. In New England it seems, any energy project with a public benefit is seen as synonymous with trampling some individuals’ rights.

Whatever the extent of the looming energy crisis in New England it is of our own making. If you don’t want renewable energy production (wind, solar, hydro etc.), gas-fired power plants and the pipelines needed to support them, or any other power producing facilities built, you have no right to complain about the availability or cost of energy in the region. Personally, I would like to see more renewable energy produced in New England and New Hampshire but that doesn’t mean we should refuse the benefits from a greater supply of natural gas. If we do, we will only put ourselves at a greater energy disadvantage than we already face. There are many reasons (aesthetic, environmental, etc. technical) why renewables are not a more favored option for generating electricity in the U.S. but most of the arguments in opposition are based on costs. Too often these arguments are made by ideologues, vested interests, and others with an agenda, most of whom have no idea of how to measure the true cost (levelized cost of energy or LCOE) of production by different generation sources or the hidden as well as direct subsidies provided to each.

Despite highlighting the increase in natural gas production this is not a post about the merits of hydraulic fracturing. In the coming years the benefit/cost calculus of “fracking” will be refined. This post is about whether New England will realize any of the benefits that result from an increasing supply of natural gas in the country. I have written before that I do not believe energy prices are the root cause of New Hampshire’s recent slower economic growth (we have had high relative energy prices during the state’s boom periods and New Hampshire is producing more goods and services with a lower energy content per dollar of gross state product than ever before). But even if not a savior, a more stable and abundant supply of energy resources at lower prices would have real economic benefits. Whatever your views of its merits, there is little doubt about the impact of the boom in shale oil and gas production on U.S. energy independence, it will no doubt alter the economic, fiscal and the international geo-political landscape of the country. In ten years it is quite possible that the only nation from whom the U.S. imports oil is Canada. Whether the shale oil and gas boom also alters the prospect for NH’s energy and economic future is less certain but is almost entirely within our control.

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To Divest or Not to Divest Electricity Generation

April 9, 2014

Whether or not New Hampshire’s largest electric utility should divest its generating facilities is a hot topic again. The NH Public Utilities Commission issued a preliminary report last week which concluded that it is in the economic interests of PSNH’s retail customers for the company to divest its generating assets. The report was less sanguine about the economic impacts on customers not purchasing electricity from PSNH, but that depends on how the stranded costs are allocated in any divestiture.

“Staff continues to believe that over the long term, PSNH’s default service rate will be substantially higher than market prices resulting in continued upward pressure on default service rates. Based on La Capra’s forecast of wholesale prices in New Hampshire and adjusted for retail, Staff’s rate analysis indicates that PSNH’s default service customers would be better off under a divestiture of the PSNH assets if the stranded costs were recovered from all customers. Customers who do not receive default service from PSNH, however, would see rate increases through the imposition of a stranded cost charge. While we recognize the volatility in today’s energy markets, the value of PSNH’s “hedge” will likely diminish over the long term and will continue to be at risk due to potential environmental legislation.”

There are also smart and well-meaning people in New Hampshire who argue that that PSNH’s generating assets provide a valuable ‘hedge” given the volatility of fuel (primarily natural gas) prices and the impending retirement of several regional electricity generating facilities. But the value of that hedge depends, in part, on the price paid for it. This winter’s cold snap and concomitant spike in natural gas prices are times when the PSNH hedge did provide some benefits. But even in those instances, the net electricity generated by PSNH was below what it was in the early and mid-2000s (the latest available data is for January of 2014 so this may change with February and March data). The figure below shows the capacity utilization of PSNH’s coal-fired generating units on a monthly basis during three separate time periods. Capacity factors are the ratio of net electricity actually generated to the total potential electricity that could be generated by a facility (for this analysis I used the average of winter and summer coal-fired capacity for each facility -Merrimack and Schiller stations – rather than the nameplate capacity).

Monthy capacity
The chart shows that from 2004 to 2009, PSNH’s coal-fired generating units were primarily ‘baseload” generators, operating at 60% of capacity or higher. I have previously written about how electricity gets sold into the regional market and which generators will provide that electricity (which determines their capacity utilization) so I won’t cover that again here. Baseload generating units typically operate 24 hours per day year-round baring maintenance outages. At the other end of the spectrum are peaking generators, which mainly operate when hourly electricity load demand is at its highest (think the hottest summer and coldest winter days). Intermediate (or cycling generating units) operate between base load and peaking generators, varying their output to adapt as demand for electricity changes over the course of the day and year. After 2009 the decline in natural gas prices along with higher generating costs, including environmental, associated with PSNH’s coal facilities have resulted in the price at which it can supply electricity to the regional grid being higher than many other generators. As long as their generating cost remain higher, except for times of peak demand, limited capacity by other generators, or when events like the spike in natural gas prices occur, PSNH’s coal-fired units will produce little electricity for sale to the regional grid. During 2013 alone, there were six months when the coal units operated at less than 10% of capacity. PSNH’s coal-fired units have gone from baseload, to intermediate generators and as the chart below shows, when averaged over 12 months, they are looking a lot more like peaking units. Whether this pattern will continue is the heart of the debate over whether PSNH should be required to divest its generating assets.
Annualized generation
It becomes a lot harder to amortize the costs of generating units as their capacity utilization is lowered. There may be times when the hedge provided by PSNH’s generating assets provides a benefit and that would be truer if the units were baseload generators. But even with the extremes of this winter’s cold, price spike in natural gas, and high demand for electricity, the chart above shows, over the course of a year, the facilities have moved from baseload generators, to intermediate, and are trending toward peaking units. The NH Public Utilities Commission, its consultants, and a lot of other knowledgeable people think that, despite current market conditions and the uncertainties surrounding regional generating capacity and natural gas supply and price, these trends will continue.

The Outlook for Natural Gas Prices in New England

May 3, 2013

There is a lot of discussion, debate, advocacy and lobbying about whether New England’s energy future is becoming more vulnerable because of the region’s increasing reliance on natural gas for electricity generation.   Some see the prospect of rising natural gas prices (because of increasing demand in the region and nationally) as a vulnerability and others are concerned about constraints on the pipelines that bring natural gas into the region.  I’ve posted a lot about natural gas and electricity related issues and as I have previously stated my belief that regional increases in demand along with greater U.S. production of natural gas are more likely than not to create scenarios that will increase the capacity of the regional pipeline infrastructure. New England has traditionally been a region with a relatively low percentage of its energy consumption in the form of natural gas.  That is changing rapidly, but increases in U.S. production of natural gas along with demand driven incentives to increase infrastructure capacity in the region should reduce a lot of the volatility of natural gas prices in New England.

Apparently there are other folks who feel similarly.  The U.S. Energy Information Agency (EIA) released its “Annual Energy Outlook” last month and it has a wealth of historical data, forecasts and projections.   Their forecast of natural gas prices across the country are based on many economic, energy demand, production and other variables.  They also produce a range of forecasts based on different assumptions about economic growth , energy demand and prices.  The good news is that their baseline forecast for natural gas prices in New England (chart below) shows that  prices in the region, which are traditionally higher than in most other regions of the country, are expected to align with the national average early in the next decade, and then move lower than the national average over time.  Even better news is that this forecast is not dependent on a much weaker economy in New England than in the rest of the country (which would imply lower increases in energy demand in the region compared to the rest of the country).  I don’t think EIA would be forecasting lower relative prices in New England if they did not see  region’s pipeline infrastructure issue as being addressed.
NE Nat Gas Price vs US Forecast
The EIA also projects that the price of natural gas relative to coal will continue to increase.  Coal will probably almost always be a cheaper fuel than natural gas but today’s typical “combined-cycle” natural gas generating facilities are much more efficient than coal-fired plants.  When the ratio of natural gas prices to coal prices is approximately 1.5 or lower, a typical natural gas-fired combined-cycle plant has lower generating costs than a typical coal-fired plant.   Natural gas-fired electricity generators enjoyed a strong competitive advantage over coal plants in 2012 but natural gas plants will begin to lose competitive advantage over time, as natural gas prices increase relative to coal prices.    The retirement of older coal-fired generating plants, however, will mean that coal continues to generate a smaller percentage of the region’s and the nation’s electricity.

Some see New England’s increased use of natural gas as a concern.  There are issues that need to be addressed but none that are insurmountable or that should have the region reconsider its increasing reliance on natural gas.  Long-range energy price forecasts are notoriously difficult but New England’s energy needs and interests are finally becoming more aligned with the rest of the nation.  For too long New England has been an anomaly as the most oil-dependent and least natural gas-dependent region in the country.  Personally, I would rather have 300 million people concerned about my energy needs than just 15 million.

Between a (Black) Rock and a Hard Place

March 19, 2013

If I am the state’s largest electric utility I have to be hoping that the limited natural gas pipeline infrastructure that supplies the New England market never gets expanded, that shale gas production has even more environmental impacts than it appears to now, or preferably both.  I’ve written probably too many times about the electric power industry (as well as the commercial and industrial sectors) switching to natural gas (primarily at the expense of coal but also oil) because of its lower carbon intensity and significant decline in price over the past decade.  Increased demand for natural gas along with New England’s limited pipeline infrastructure have caused natural gas prices to rise in New England more than in most other parts of the country but I don’t think that is reason to “jump ship” from natural gas.   Natural gas production is increasing and it will likely be sometime early in the next decade before the increase in demand for natural gas in this country outstrips growth in supply (even though it feels like it in New England because of our pipeline limits).  Coal is cheaper and becoming cheaper still for good reason, the demand for coal as a fuel for electricity production is declining rapidly and despite being a lower cost fuel, that doesn’t mean facilities that burn coal can sell electricity more cheaply than can producers using more expensive fuel.

I  briefly noted how electric power gets sold into regional markets in an early post.  The Cliff Notes version of that is this: The suppliers of electricity (generating companies) in a region offer to supply electricity to the market at a given price and the offers are accepted beginning with the lowest cost providers first, until enough energy is supplied to meet expected demand in the region.  The price of electricity offered by the last electricity generator needed to meet the regional demand determines the market price paid by companies that supply the electricity to businesses and consumers.

So here is the rock (black) – our state’s largest utility has a large generating facility that burns cheap coal but because it costs a lot to burn coal in a way that doesn’t make NH look like Beijing on a bad day, the price of that electricity is high relative to other electricity producers in the region who are also offering their electricity in the regional market (primarily natural gas  generators).  The electricity generated by the coal burning facility has increasingly not been sold into the regional market.  As the graph below shows, the longer-term trend indicates that the percentage of New England’s electricity that is generated by Merrimack Station has been cut by more than half.  It is a 12 month moving average to smooth the results and prevent readers from getting nauseous from bouncing lines, but the trend is clear and troubling if you are a generator with a coal-burning facility.

Merrimack Station

The “hard place” is the growing loss of its residential customer base as retail competition finally takes hold.  A lot was made of the financial difficulties of one competitive supplier to NH’s residential market and the resulting return of its customers to the default service provider, but anyone who thinks that is going to stop the train from leaving the station is going to find themselves looking for another way to get to their destination.

When your generating business is weakening and your retail business is declining, all that is really left for growth is your transmission business.

Tilting at Windmills?

February 11, 2013

“Do you see over yonder, friend Sancho, thirty or forty hulking giants? I intend to do battle with them and slay them. With their spoils we shall begin to be rich for this is a righteous war and the removal of so foul a brood from off the face of the earth is a service God will bless.”     

Don Quixote

I hope I am not, but I probably am, the only person that sees the irony in the fact that the latest wind farm battle in New Hampshire involves a Spanish developer of wind farms (Iberdrola Renewables).   The proposed wind farm near Newfound Lake has many of the residents in that area concerned about the visual and noise impacts of the project.  Electricity generation from wind has grown significantly throughout the country over the past several years and along with this growth has come a concomitant increase in opposition to the projects.

Wind generators accounted for a significant portion of capacity additions since 2007 (see chart below), and were the largest source for generating capacity additions in 2008 and 2009. If all planned wind generators in 2012 come on-line, as reported by industry participants, wind capacity additions could top 12,000 MW for this year. This would account for 45% of total additions and exceed capacity additions from any other fuel source, including natural gas, which was the leading fuel source for electric generating capacity additions in 2010 and 2011.

additionsbytype

The wind energy production tax credit (PTC), along with state-level policies, has boosted the growth of the U.S. wind industry over the past decade and the anticipated expiration of the PTC at the end of 2012 created a rush to complete projects in 2012.  This tax credit was first implemented in 1992, when the United States had less than 1.5 gigawatts (GW) of installed wind capacity. By the end of 2011, wind capacity stood at more than 45 GW, about 4% of U.S. power generating capacity, and provided 3% of total U.S. electricity generation in 2011.

The most recent state level data available on electricity generated from wind (2010) show that less than 1% of NH’s electricity was produced by wind but with recent projects in the state that figure is outdated.

Wind Generation by state

I don’t know what the future of wind power is in New Hampshire.  I have no professional or business stake in the issue. Like everywhere, aesthetic issues and local opposition will play a prominent role in determining its growth but there are other issues that must be considered if policymakers are to make reasoned decisions about its efficacy in meeting the state’s power needs.  The two most often cited concerns about wind as a source of electricity (besides aesthetic and local opposition) seem to be that turbines are so inefficient that they actually increase carbon dioxide emissions, and that they are so unreliable that they require constant backup from conventional coal and gas-fired generators.  Concerns about increased carbon from wind seem misplaced to me.   As electricity demand increases, say on a weekday morning when people are waking up and getting ready to go to work,  power plants increase output to meet it. Plants with the lowest marginal cost – that is, those that can produce additional electricity most cheaply – are selected first by the market. Here wind beats gas and coal, as no fuel is needed to generate electricity.  So in theory at least,  adding wind power to the energy mix should displace coal and gas, and hence cut carbon.  On the important matter of reliability, the obvious worry is that because the wind does not always blow, the system will sometimes not be able to supply electricity when needed.  This seems like common sense.   But the reliability of wind power does not depend on the variability of wind, it depends on how well changes in wind power output can be anticipated. Forecasts of wind farm output are increasingly accurate, and drops in output can be predicted and compensated for using conventional power stations.

I have driven by wind turbines in several states and am in awe of their size visual impacts.  I don’t know how I would feel about living near them,  but I also can’t ignore that the world (especially in the UK) is increasingly using wind power as a way to limit fossil fuel consumption and carbon emissions.

The Stone Age Didn’t End Because of a Shortage of Stones

January 24, 2013

The operator of the New England power grid (ISO New England) issued a media release yesterday noting that because of the decline in natural gas prices, overall, wholesale electricity prices in the region dropped in 2012.  Reader”s” (if there is more than one) of this blog know I write a lot about energy issues and have noted the trends and benefits of natural gas to energy prices in the region (here, here, here, and here as well as in posts about other energy issues).

Increased U.S. production of natural gas has resulted in price declines and price declines are resulting in more fuel switching that will put more pressure on the price of natural gas unless production increases faster than increased demand.  U.S. production of  natural gas is likely to continue to increase faster than other fossil fuels (see chart below), but increased fuel switching will put more pressure on natural gas prices.

US fossil fuel production

One problem for New England is that our infrastructure for delivering natural gas to the region is the weakest of any region of the country and one result is that unless or until that changes, we won’t benefit as much as other regions from increased production.  The chart below shows a forecast of real, inflation adjusted fossil fuel prices to 2040.  Nationally, natural gas prices will rise faster than coal, but more slowly than oil.  The natural gas price trends here are for prices at Louisiana’s  Henry Hub distribution point (the reference price for natural gas prices), New England prices are higher but the question is, how much faster or slower will they grow in New England?  Improved infrastructure would help.

US fossil fuel prices

Coal is abundant and prices will grow relatively more slowly, but the economics of coal as an energy source still don’t give it an advantage over gas.  Over the next 3-5 years over 200 coal-fired electric generating plants will be retired according to a coal trade group.  They blame environmental regulations but there is more to it than that.  Besides the greatly narrowed gap in fuel costs between natural gas and coal, the fact is most people don’t want coal used, or have it used near them.  The cost of burning coal more cleanly is relatively high (it’s not just regulators that impose those costs, it’s the only way a majority of the public will support coal and if it costs too much they wont support it as long as there are more competitively priced alternatives – as there are now). Finally the cost of constructing a coal plant, compared to combined-cycle natural gas power plants is much higher (even without the new equipment required to reduce emissions) and they take longer to build 4-5 years compared to 2-3 years for natural gas, making financing of such projects more difficult.

I am not a coal hater.  Although I have worked on many more combined-cycle natural gas electric generating plants, I have also worked on two or three electric generating projects that burn coal, most recently one involving super-critical clean coal technologies and carbon capturing,  but phasing out older, less efficient, coal-fired plants makes perfect sense and can be done over time without jeopardizing the reliability of the grid if new natural-gas fired plants are built.  Relying just on natural gas doesn’t solve our  CO2 problem but it helps (ok deniers, let loose – I am a believer that CO2 is a problem that needs to be addressed).

The point of this post (by now you are probably asking if there is one) is that fossil fuels are not going away anytime soon.  Not too long ago there were apocalyptic predictions about the availability of fossil fuels in the future.  Those predictions aren’t proving accurate but at some point fossil fuels will run out.  Not in my lifetime, which is a good thing for my business as long as I still can get hired to work on natural gas or (gasp) coal-fired electric generating projects.   But more abundant fossil fuel doesn’t (or shouldn’t) lessen environmental concerns over its usage.  The stone age didn’t end because of a shortage of stones and the fossil fuel age shouldn’t wait to end until we run out of it.  Somebody will have to pay for developing new technology that ends the fossil fuel age.  Unless we start now,  the cost of the U.S. debt that we pass down to future generations will look small compared to the costs of developing new energy technologies that we will be passing down in the face of genuine declines in fossil fuels.  It is not just a matter of  increasing renewable energy,  although that will help.  Solar and wind and even hydro generation suffer from over/under demand issues.  Balancing power output to need is extremely problematic once you try to get renewable power above 20% of total generation, new technologies need to be developed.

The stone age was replaced because newer and better technologies were developed despite an abundance of stones, lets hope the same is true for the fossil fuel age.

Say What About Natural Gas Prices?

December 14, 2012

I read a story in the media today where an electric utility is justifying a large rate increase based on the notion that  the price of natural gas for electricity generation has risen by 20% in the past 2 1/2 months.    Hmmm.  Price data for natural gas for electricity production isn’t available in NH because of the small number electricity producers means releasing it would violate disclosure regulations.  Price data for the U.S. and for Massachusetts is available though, and while it does stop at the end of September 2012, it suggests that natural gas prices for electricity generation have been substantially lower for the most of the past two years.   As of September 2012, the year-over-year change in natural gas prices for electricity production in the U.S. and in Massachusetts averaged -30% for the preceding 12 months.  It is hard to see how a 2 1/2 month increase will negate average reductions of 30% over the preceding 12 months.  But a lot of the calculations used in setting electric rates doesn’t conform to mathematical laws.

Nat gas for electrticty 12 mos MA

One would think years of natural gas price declines would have prompted greater  price reductions if  a 2 1/2 month rise warrants a large increase.  Looking at price changes over the same month of the prior year year (to avoid any seasonal distortions that can occur), you can see the prices fell by as much as 40% or more  in 2012.  Prices do vary by state but not enough to negate these trends.  Sure, prices do rise and have very recently, but not enough to offset the tremendous drop they have experienced over the past several years.

nat gas prices for electricity no moving avg


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