Executive Insight, Generation, Natural Gas

Natural Gas Heats up Generation Discussions Again

Issue 1 and Volume 92.

By Teresa Hansen, editor in chief

It’s been said many times but warrants repeating: Shale gas has been a game changer for the U.S. energy industry.

Before 2005 when natural gas hit its highest price–just more than $15 per million cubic feet (Mcf)–most energy experts assumed recoverable U.S. natural gas supply was limited and the days of cheap natural gas were gone for good.

They were wrong.

Horizontal drilling coupled with hydraulic fracturing, or “fracking,” has allowed producers to profit while recovering natural gas from sedimentary rock formations or shale plays.

Shale gas provided less than 1 percent of natural gas produced in the U.S. in 2000. Today it provides more than 20 percent and is expected to provide some 53 percent of all natural gas produced in the U.S. by 2040, according to the Energy Information Administration (EIA). As a result, the U.S. is being called the “Middle East of natural gas.”

This influx of natural gas has affected its price. In April 2012, the spot market price of natural gas hit a decade low of just more than $1.80 per Mcf–a price most never expected to see again. At the end of December, the price was around $4.30 per Mcf–an increase of more than 25 percent from January 2013 and a price that will keep most producers drilling.

Growth in natural gas supply has changed the business climate for U.S. gas producers and electricity generators, too. Natural gas has become the fuel of choice for new generation, much of which is replacing electricity lost from retiring coal-fired plants.

“We believe (natural gas producers’) greatest and most immediate opportunity is power generation,” said Michelle Bloodworth, senior director of power generation for the American Natural Gas Alliance (ANGA), during PennWell’s POWER-GEN International Conference in November. “It is hard for other fuels and technologies to beat combined-cycle efficiency.”

ANGA represents 26 large independent U.S. gas producers and covers four sectors: power generation, transportation, industrial and exports.

In addition to efficiency, natural gas has environmental benefits, Bloodworth said.

“It produces 50 percent less CO2 emissions than coal, as well as much less NOX and has the added benefit of producing no SOX or mercury,” she said.

Increasing environmental restrictions on coal-fired electricity generation and low-priced abundant natural gas in many parts of the U.S. have created a dash to gas. This is not the first time in recent decades that electricity producers have turned to natural gas. In the early 1970s, electric utilities increasingly fired their boilers with natural gas.

Natural gas shortages, price volatility and the Powerplant and Industrial Fuel Use Act (1978), however, drove utilities to other fuel sources, and the large baseload coal-fired and nuclear power plant construction boom began.

In the late 1990s, more efficient combustion turbine technologies, lower natural gas prices and a growing economy again drove utilities and independent power producers to build new natural-gas fired generation.

Then higher natural gas prices and low coal prices curtailed its use again.

U.S. natural gas supply and price have been historically volatile, and many industry experts and economists warn that history repeats itself. Most don’t predict a repeat of the 1970s, but many have said history should not be ignored.

Bloodworth disagrees. She said utilities shouldn’t worry about natural gas supply and price for many years.

“We are confident in continued price stability because of the shale gas revolution,” Bloodworth said.

Between now and 2035, ANGA expects gas prices to remain between $4 and $6 per Mcf because drilling and recovery technology continue to get “better and better,” she said.

“The U.S. is the largest natural gas producer in the world,” Bloodworth said. “Its natural gas resource base has increased 75 percent in the last five years, and new shale gas continues to be opened up.”

In addition, 50 percent of the resource base is onshore, which in many cases keeps gas supply close to generating units and load, she said.

Policies Strengthen Natural Gas Stand

Revis James, EPRI’s director of generation R&D, also spoke at POWER-GEN International. He said natural gas-fired electricity generation has strengths and weaknesses.

Electricity generation in the U.S., especially coal-fired generation, is constrained by policy and technology, James said.

Pending policies related to CO2 emission reduction along with existing limits on NOX, SOX and mercury have created uncertainty for coal-fired generation’s future. Pending water regulations have added to that uncertainty, he said.

There has been a push for renewable energy to replace much of the retired coal-fired generation. Renewable energy is generally considered environmentally friendly, but not everyone agrees, James said.

Environmental groups criticize wind facilities for excessive land use and effects on wildlife, as well as sound and visual impacts. Groups also criticize solar energy for excessive land use and negative visual impact in addition to using hazardous materials during manufacturing. Both technologies depend on government subsidies and tax incentives, which draw ire from many who say policy rather than economics is driving technology decisions. Taken together, the effect is uncertainties for renewable energy facility investors and owners.

These policy-driven coal and renewable energy issues and uncertainties make natural gas attractive to those investing in new generating facilities.

Technology Elevates Natural Gas’ Status

All electricity generators face generation constraints, including meeting demand, maintaining reliability, minimizing cost, coping with long lead times for technology deployment and hedging technology risk, James said.

When compared with other generation technologies, combined-cycle gas turbine (CCGT) technology fares well against these constraints, he said.

“Low natural gas price makes combined-cycle gas turbine technology attractive because the break point falls between $4 to $6 (per Mcf),” James said.

Benefits of CCGT vs. coal-fired generation technologies, he said, include:

  • Reduced fossil plant emissions, including CO2;
  • Better performance with renewables because CCGT provides more operational flexibility;
  • Smaller capital outlay for new capacity;
  • Quicker to build; and
  • Lower water requirements.

These attributes allow generators to delay investment in more expensive options, James said.

Challenges of Natural Gas-fired Generation

Natural gas-fired CCGT technology has many attributes, especially with today’s price, but it is not without its challenges.

Dynamic combustion control, or balancing efficient operations with emissions control, can be tricky, James said. In addition, CCGT cycling and heat recovery steam generator reliability can be a problem, especially when renewable portfolio standards (RPS) dictate increased cycling of CCGTs.

These technology challenges are manageable, James said. CCGT is trending toward higher efficiency with improved metallurgy and coatings, better cooling technology, more aerodynamic design and larger size.

New CCGT machines must be able to switch fuels easily, cycle frequently to allow for operational flexibility and be built with durable components.

“G- and H-class machines are beginning to be installed, and they are an improvement of the F machines,” he said. “Later models are being designed to run more as baseload units instead of peakers. Also, designers and manufacturers are now looking to design units that can run for 60 years instead of 20 because the electricity sector needs long-term assets.”

Supply and Price Volatility Concerns

EPRI members with whom James works generate some 90 percent of all electricity in the U.S, he said. He understands generators’ concerns, and uncertainties about supply and price are one of the biggest.

“Fifty-five percent of (CCGT) electricity production cost is directly tied to fuel costs, so price volatility is important and can drive up the price of electricity,” James said. “Hedging against future high price and volatility is important.”

Even given Bloodworth’s confidence that supply will not be a problem and the EIA’s predictions on U.S. shale gas production, James said generators are concerned about supply assurance.

“There are concerns about fracking’s impact of the environment,” he said.

Several environmental groups, including the Natural Resources Defense Council, assert that the chemicals mixed with the water and sand injected into wells at high pressure during fracking have polluted drinking water in several states, including Arkansas, Colorado, Pennsylvania, Texas, Virginia, West Virginia and Wyoming. The group says residents in these states have reported changes in water quality or quantity after fracking.

Some 14 states have enacted fracking disclosure laws that require natural gas producers to disclose the chemicals used in fracking, the waste generated, how that waste is managed and details of how and where fracking was completed.

In addition, the Environmental Protection Agency (EPA) is working with states to help ensure natural gas extraction does not harm public health and the environment. The EPA is conducting a study to better understand potential fracking impacts on drinking and ground water. A draft report is expected to be released for public comment and peer review this year, according to the EPA website.

Many experts have said the state rules and the EPA’s study are the first steps toward crafting more stringent fracking regulations.

Earthquakes are another fracking-related concern. Property owners in several states have filed lawsuits against natural gas producers. They argue their homes and property have been damaged by fracking-spawned earthquakes. Geologists’ opinions are mixed.

A Dec. 6, 2013, article in The Dallas Morning News said, “U.S. Geological Survey geophysicist William Ellsworth released a study this past summer concluding that several of the largest earthquakes in the central U.S. in 2011 and 2012 were probably triggered by nearby injection wells, including a magnitude-5.6 quake in Oklahoma that destroyed 14 homes and injured two people.”

The article said that in 2012, seismologist Clifford Frohlich of the University of Texas at Austin identified 67 earthquakes of a magnitude 1.5 or higher that occurred in the Barnett Shale between 2010 and 2011.

Environmental backlash against fracking is growing. The electricity generation industry has seen how regulations and opposition affect coal-fired generation. Industry insiders understand how environmental regulations could change ANGA’s and the EIA’s supply and price predictions.

“Electricity generators must hedge against disruption of supply,” James said.

Even if natural gas is abundant, it must be able to flow where it’s needed. Some areas in the U.S. have constrained supply because the pipeline infrastructure is not ready to support the increased use of natural gas for power generation, said Jameson Smith, MISO manager of regulatory studies for the transmission asset management group.

“Shale play has fundamentally changed how gas is flowing on the pipes,” Smith said during the recent TransForum East Conference in Washington, D.C.

“MISO projects that 12 to 15 percent of the coal fleet in its territory will retire based on economics (gas prices), emissions regulations and RPS requirements. MISO is going to become a destination for gas from all directions because of the shift from coal to natural gas. Before it was just a place where gas flowed through the area’s pipelines.”

MISO is not unique; the scenario is playing out in other independent system operators territories. Environmental regulations, renewable requirements and cheap, abundant natural gas are changing the electricity generation landscape.

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