AEP's Nick Akins is decreasing significantly the amount of coal-fired generation and boosting gas and renewable energy production, but he seems less than sure that the current rise of gas-fired power is a good thing for the nation. thehill.com/blogs/e2-wire/e2-wire/224035-aep-president-warns-of-natural-gas-price-volatility Speaking yesterday to the US Chamber of Commerce, Akins frets America could become too dependent on natural gas power plants and then find gas to be expensive.
Is Akins right to worry? And should his focus be on just the price of gas?
EIA reports that coal prices have increased at a compound rate of 6% for ten years. US coal exports have surged in 2010 and 2011, as coal becomes increasingly priced in a global market that is straining to supply voracious coal demand from China and India. Consequently, focusing on just natural gas when discussing price volatility of fossil fuels is a mistake, but the topic of fossil fule price volatility is timely, since an historic shift in power production is underway.
Those in the generation business have been burnt in the past by rising natural gas prices that made substantial investment in natural gas power plants uneconomic for long periods, during the last 10 years, so Akins is voicing a common concern about natural gas. Power plant investors understandably fear a repeat.
But unless Rolling Stone Magazine and the New York Times is right that shale gas is a Ponzi scheme (they are not), the US natural gas supply position has been revolutionized by shale gas. Akins, however, worries that environmental risks could undercut shale gas production.
Environmental risks associated with natural gas production exist but are less than those associated with coal and oil and arguably less than those posed by biofuels and nuclear power. The risks can be further minimized by a combination of strong regulation and excellent operations.
Natural gas power production is a good thing, but it is possible to use too much of a good thing. Could so much gas be exported and so much gas be used for generation, transportation, and industrial processes that demand exceeds even the shale boosted supply and price explodes? America is certainly not close to such a scenario, as natural gas prices have collapsed, and a still reasonable $6 for a thousand cubic feet is now at the top of many price forecasts. Moreover, policies like Renewable Energy Portfolio standards for electric generation and transportation fuels already exist that protect against such an outcome.
Diversity of generation sources remains important for energy security, and policies that support energy diversity are good investments for our future. The good news, however, is that the nation's energy supply is currently becoming more diverse and not less. Gas is rising to 29% of power production this year; coal is falling to 38%, but still provides more electricity than any other energy source. And that is not the entire story.
Renewable energy is booming and typically has zero fuel costs, making renewable energy a good hedge against the possibility or reality of rising fossil fuel prices. Indeed 29 states have Renewable Energy Portfolio Standards that serve to insure increasing diversity of electric generation sources. California will get 33% of its electric power from renewable energy sources as soon as 2020. By the end of this year, seven states will get more than 10% of their electricity just from wind power.
The nation and California also have renewable energy or low-carbon transportation fuel requirements too. As a result, ethanol and biodiesel production has boomed over the last 5 years.
And let's not forget that America also gets about 20% of its electric power from nuclear energy, and the nuclear industry has done a great job of getting more power from existing nuclear plants.
Finally, there is negawatts--energy efficiency and demand response. As one example, the PJM power pool, America's largest wholesale electricity market, has more than 15,000 megawatts of demand response and energy efficiency providing capacity from Chicago to New Jersey. America is getting more energy efficient every single day and this is a vital form of energy diversification.
America is on track to have a more diverse, cleaner, and affordable energy supply. The natural gas boom is one, big reason why so much is going right on energy for Uncle Sam.
That's actually one of the reasons why guys like me and Tim Kelsey at Penn State and others have been a little skeptical of the industry's push lately to build support for exports. Not only is it likely to be shortsighted from a business perspective -- by the time they got those things approve and built most of the foreign markets will be developing their own shales using the technology they picked up by buying stakes here -- but it shifts the focus away from developing a comprehensive plan to use the stuff here for the advantages the industry claims it has. If done properly (I know that's a big IF) that could help stabilize prices at an optimal level for quite a while.
ReplyDeleteThe challenge for renewable energy investments and the public policies that support them is a view which potentially overstates the ability of gas prices to support incredibly low prices for a very long-term (say 10 to 20 years). Because there is not a long-term forward market for either gas or electricity to send price signals for resource diversity, we are reliant largely on public policies that encourage resource diversity in their own right. Without these public policies the type of price volatility challenges which AEP's CEO foresees could be possible. I appreciate that this blog takes a balanced view of this dilemma, but it will be increasingly important as gas prices stay low to continue to strenously encourage resource diversity.
ReplyDeleteEric T.