Friday, June 05, 2009

Shale Gas and Climate Change

In Wednesday's posting on the likely consequences of the latest version of greenhouse gas (GHG) cap & trade legislation, I hinted at an important option for electricity suppliers to reduce their emissions promptly. Today I'd like to elaborate on it. Although the power sector accounts for the largest share of US GHGs, its existing generating fleet already has the potential to reduce those emissions substantially by relying less on coal-burning plants and more on those that burn natural gas. That could be done with little or no new investment, at least on the part of generating companies. This isn't exactly a new idea, but what makes it feasible now--when it wouldn't have been not so long ago--is the development of enormous new US natural gas resources found in shale deposits such as the Barnett, Haynesville and Marcellus shales. Twice in just the last week I have seen shale gas referred to as a "game changer", without the least hint of exaggeration.

Capitalizing on shale gas to take a big bite out of US GHG emissions would depend on two key facts: First, gas-fired power plants emit on average 37% less CO2 than coal-fired plants. At the same time, although the US generated more than twice as much electricity from coal as from gas last year, we actually have more gas-fired generating capacity than coal-fired. The former is merely utilized less--an average of 25% of the time, compared to 73% for coal--for reasons that made perfect sense in a world in which CO2 emissions didn't matter. If we doubled our utilization of existing gas-fired power plants and burned correspondingly less coal, the country would emit roughly 330 million fewer tons of CO2 per year, representing about 13% of the emissions from the power sector, or a reduction of a bit more than 5% of all US net emissions. And that's probably a conservative estimate, since the best combined-cycle gas turbine power plants emit less than half the CO2 per kWh of the oldest, least efficient coal-fired plants.

There are two principal reasons we aren't doing this already. The simplest is that coal has generally been much cheaper than gas on a fuel cost per kWh basis. However, the recent drop in gas prices has already put significant pressure on coal prices. At $4 per million BTUs, even at an unspectacular turbine heat rate of 8,500 BTU/kWh, the marginal fuel cost of gas-fired power is only 3.4 cents/kWh. But $4 gas may not be sustainable, since shale deposits are not exactly low-cost sources. The current long-dated gas futures price of roughly $7/MMBTU reflects that. In order for gas to displace large quantities of coal, it would probably take both stable gas prices higher than today's plus the kind of CO2 pricing envisioned under cap & trade--provided the utility sector isn't entirely insulated from this by excessive free emissions permit allocations.

Another reason for the current fuel mix is that most coal-fired power plants were built to run in baseload mode at high utilization rates, while many gas turbines were built to run intermittently to cover mid-peak and peak power demand. They probably couldn't all run at an 80-90% utilization rate, though we wouldn't need them to. They're also not evenly distributed around the country. California has lots of gas turbines, because that's pretty much all you could build there since the 1970s. That's not true everywhere. However, probably the biggest limitation has been concerns about the long-term availability of gas. Power generation already consumes 29% of the US gas supply, which in 2008 was about 87% domestic and 13% net imports, mostly from Canada. Until recently, any incremental demand would have been expected to be met mainly from imported LNG, at a higher price than domestic gas, or by destruction of existing demand in other sectors, such as chemicals. Abundant shale gas has altered that outlook, while putting downward pressure on LNG prices, as well.

In some respects, this is all somewhat "back to the future"; a decade ago it was widely assumed that natural gas would play a pivotal role in reducing our emissions. That notion went partly out of fashion, as gas prices climbed and environmentalists focused more on the lower emissions from wind and solar power, which despite their rapid growth still generated only 1/16th as much power as gas last year. The potential of shale and other "unconventional" resources makes gas once again a viable medium-term strategy for mitigating climate change, with a few caveats. I recall seeing similarly exuberant forecasts of gas supplies in the late 1990s, just before conventional onshore production nosedived and prices spiked. Shale gas looks more sustainable, but it depends on lots of well-capitalized companies drilling like crazy and earning enough from that to keep on drilling. If the economics don't hold up, most of that gas will stay underground. It also depends on drilling techniques that have suddenly become controversial, as noted on API's new blog. Preserving this option for reducing GHG emissions will require Congress and regulators to stay focused on the big picture.

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