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Tuesday, November 16, 2010

Does Shale Gas Portend End of Fixation with Renewables?

A recent 60 Minutes segment on shale gas drilling started me thinking about our energy future, wondering if this latest evolution in natural gas production could mark the beginning of the end for the “renewable energy at any cost” policies that constitute the current conventional wisdom among regulators in the energy industry.  The fascination with renewable resources is due to fall out of favor sometime soon, the only questions are what will drive it and when it will happen.  Looking back at developments over the last 40 years suggests that we’re about due.  In the 1950s and 1960s, the focus was on building larger and larger central power plants that relied on inexpensive fossil fuels to generate electricity at lower and lower unit costs.  In the 1970s, as petroleum prices became more volatile, nuclear power became the choice for the future, promising power at prices “too cheap to meter.”  Nukes fell out of favor in the 1980s following the Three Mile Island and Chernobyl accidents, in many cases changing from a favored resource to being severely restricted or even banned.  PURPA became the mantra of the next decade or so, as qualifying facilities using renewable fuels or cogeneration (aka combined heat and power) became the wave of the future.  As increases in energy efficiency reduced load growth and generation surpluses became an issue in the 1990s, there was a move in California to renegotiate the more costly PURPA contracts and shut down the unneeded generation.  That further evolved into the development of competition in the generation of electricity and the “de-regulation” that took place in the last half of the 1990s.  The California energy crisis of 2000-2001 gave relying on markets a bad name, just as the latest environmental trend (global warming) and the latest petroleum price spike increased the popularity of renewable resources and brought us where we are today.

What is it about shale gas that suggests that it could presage the end of the renewable decade?  The simple answer is cost, particularly as it applies to environmental impact and energy security.  

Environmental Impact – Natural Gas and Global Warming
One of the primary justifications for renewable generating resources is that they mitigate global warming by generating electricity without emitting any greenhouse gases (GHG).  Wind and solar, the most widely considered renewable resources, directly produce zero GHG.  The fossil fueled generation that these renewable resources would replace do produce GHGs in the following amounts:

Table 1 – GHG Production
Heat rate
Nat Gas CCGT
Nat Gas CT

By displacing coal, renewable resources reduce GHG production by about .873 tonnes/MWh.  If replacing natural gas combustion turbines or steam plants, renewable would reduce GHG production by about .53 tonnes/MWh, comparable to the GHG reduction that would result from displacing coal with CCGTs.  Because coal currently generates 49% of the electricity consumed in the US (Table 2), replacing it with a combination of wind and solar would require 250,000 to 350,000 MW of new wind turbines and 400,000 to 600,000 MW of new solar generation.  Replacing coal with CCGTs would require roughly 300,000 MW, and increase current natural gas consumption by about 60% (~14,000 BCF/year) to three times the amount of natural gas currently used to generate electricity.  The potential for significant increases in natural gas production from shale production could make natural gas a more viable alternative in the future.

Energy Security
Another argument for renewable power generation is that it reduces reliance on imported oil.  The only problem is, that’s not true.  Table 2 shows the net generation by energy source in the United States for 2007.  AT 1%, imported oil is a trivial source.  While the US does import about 16% of its natural gas, virtually all of it comes from Canada.  

Table 2 – US Electric Generation Sources, 2007
Fuel Source
% of total
Petroleum liquids
Natural Gas
Other renewable
Source:  EIA Net Generation Table

Increasing renewables does little to improve energy security.  Indeed, to the extent that new renewable generation equipment is manufactured outside the country, it creates a different security concern – increasing trade deficits and increased reliance on foreign sources for energy production.  Considering that roughly half of the cost of generating with natural gas is for fuel or O&M, it could be argued that gas is more likely to encourage investment in the US than the renewable options.

Economics – Energy Cost
Regardless of how inconvenient (or truthful) global warming concerns may be, when all the costs are included, today’s favored renewable technologies are a very costly way to reduce GHG.  Consider the examples of off-shore wind and “middle of the desert” solar.  For the first, we can look at the Atlantic Wind Connection.  This $5 billion transmission project is proposed to deliver about 6,000 MW of off-shore wind energy to market.  A revenue requirement of about 20% of the development cost, combined with an expected capacity factor of 40% for the wind generation, would result in a transmission cost adder of about $47/MWh just to deliver the wind generation to the grid.  That's on top of the cost of the generation itself.  According to the California Energy Commission Comparative Costs of California Central Station Electricity Generation report, offshore wind resources cost about $4,000/kW, for an annual fixed cost of about $800/kW year.  Assuming O&M cost of about $5/MWh and a 40% capacity factor, that’s about $228/MWh, plus the gen-tie cost of $47/MWh, results in a delivered cost of $280/MWh.  This does not include the cost of generating capacity that must remain available for when the wind isn’t blowing. 
We can use a slightly different method for evaluating “middle of the desert” solar thermal resources.  Using filings by the large California IOU’s, it is possible to estimate (actual contract values are confidential) the cost of large central solar thermal power plants.  A “bid price” of $120/MWh, adjusted for Southern California Edison’s time of delivery factors, produces a payment of $204/MWh.  Add in SCE’s Tehachapi Renewable Transmission Projects – total cost $2.06 billion, providing 4,500 MW off-take capacity, assuming 25% capacity factor for solar – with a cost of $41/MWh, the total cost for this renewable resource is $245/MWh. 
A natural gas-fueled combined cycle gas turbine (CCGT) plant would cost about $1,300/kw to build.  It would have a 7 MMBtu/MWh heat rate, operate at a 75% capacity factor and require about $5/MWh for O&M.  At a natural gas price of $5.00/MMBtu, the total delivered electricity cost is about $80/MWh.  A new combustion turbine (CT) plant would cost about $1,000/kw to build.  It would have a 10 MMBtu/MWh heat rate, operate at a 25% capacity factor and require about $5/MWh for O&M.  At a natural gas price of $5.00/MMBtu, the total delivered electricity cost is about $146/MWh.  Table 3 considers the overall cost impact of GHG reduction. 

Table 3 – Relative GHG Reduction Cost
T CO2e/MWh
Off shore wind
Solar vs CT
Solar vs CCGT

These numbers are all based on the assumption that coal-fired generation is being displaced.  While this is arguably the case for wind, which tends to produce more during off-peak periods, it may not be the case for solar which operates primarily during peak periods when the sun is shining.  As a result it is more likely to displace less efficient natural gas fired generation,  
However you look at it, gas-fired combined cycle generation is a less costly resource and a more cost-effective way to reduce GHG emissions than solar or wind.  Given an increase in gas supply availability and continued downward price pressure due to shale gas development, gas-fueled generation could experience growth at the expense of coal and renewable generation.

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