Friday, June 6, 2014

Tech Talk - what the EPA Plan neglects

One of the problems, I suspect, with predictions of future energy use and production is that physical reality can become entangled in the politics of the day. Thus news that tends to negate the optimistic views of future American oil and natural gas production is subsumed by the need to keep the level of those predictions hecause of other political needs.

President Obama has now announced his decisions on a new incentive to combat his perception of the future as it sits threatened by the increased carbon dioxide produced by the burning of fossil fuels, particularly coal. As announced by the EPA, the Clean Power Plan “will maintain an affordable, reliable energy system, while cutting pollution and protecting our health and environment.”

The proposed rule has the intent of lowering carbon dioxide emissions by 30% from the levels of 2005, by 2030. As with many energy-related plans this one will take some time to implement, particularly since individual states have some input to the final program that will be put in place. More to the point, it will influence the thinking of power generators and legislators over the next few years.

Beyond the actual implementation, the real impact will be in the planning departments of the utility companies around the country. There is at least an even chance that, at some time in the future, these will become the regulations that must be followed, and as future power plant construction is planned, so the options that will be considered will now be changed to accommodate these likely regulations.

Realistically the closure of coal-fired plants will likely be followed by the construction of more natural gas plants, since the overall electrical energy needs of the country are unlikely to fall significantly. In the short term this is unlikely to be a problem. However as one moves into the intermediate term (say more than 5 years out) the old plants will have gone, and the country will become increasingly dependent on natural gas, in the same way as Europe is at present. As the old coal plants are demolished, they, and the coal mines that supply them, cannot be resurrected within a five-year period given the amount of permitting, financing and overall planning that is now required for such construction.

Natural gas has advantages over coal, in that it can be supplied by pipeline that makes it less susceptible to weather. But by the same token it is rarely stored on site, but metered along the pipeline as demand rises and falls. As history has shown, this can lead to critical shortages when, at times of high demand, the pipeline cannot keep up with demand.

At present the likelihood of problems seems remote, wells continue to be sunk and production in increasing in fields around the country. But if one goes beyond the picture that is projected as reassurance to those concerned for energy supply in the future the numbers revealed are not that comforting.

Figure 1. The changing picture of natural gas demand (EIA)

One begins with the prediction that the US has about 100 years of natural gas supply with a total extractable volume in reserves and resources of over 2,718 Tcf. It is a reassuring number but, as with the total volumes of either oil or coal in the ground, it does not really give that much information on what will be available as demand continues to rise.

Consider that, increasingly, the volumes of natural gas that are being sought are in shales, where the well must turn and drill along the shale horizon, before being fracked to produce gas and oil within the rock.

Figure 2. Number of rigs defined by type of well (Baker Hughes via EIA and Penn Energy)

The increasing dominance of horizontal well completions brings with it a considerable increase in well costs. You can see this as the technique became of increasing importance after 2005.

Figure 3. Change in the average cost of natural gas wells (EIA )

Well construction prices have continued to rise since that time, with numbers now running up to and beyond $10 million. The rising costs makes it harder to achieve a reasonable return on that investment, particularly as there has been no great increase in the overall price of natural gas to reflect its increased popularity, in large part because of the rush to drill and produce the known reserves.

Figure 4. Recent changes in natural gas prices (EIA )

As a result the number of rigs working in the natural gas fields has fallen, to the lowest levels of the recent past.

Figure 5. Change in the natural gas rig count over the past year. (Baker Hughes )

If you can’t make a profit on the merchandise, then after a while you stop trying to produce it. Despite the optimism that leads folk to anticipate large volumes of low-priced natural gas being able to sustain us into the foreseeable future if the companies cannot make a profit, after a while they stop. Which means that prices will go up, re-opening the cycle, but on a higher step. In time this will bring natural gas prices back up to around $8.00 per tcf, which will make the industry more comfortable.

What it will not do, however, will be to favorably impact the economics of the electricity business, where doubling the cost of fuel has a quite negative effect on prices and overall economics. But concerns over the rising price to be paid has had little impact yet on political decisions on energy in Europe, and one has to presume that a similar blindness to energy price consequences will also prevail in the United States. After all there is lots of natural gas around, it just has to be perceived as remaining a cheap fuel to validate the political plans . . .right ??!!


  1. Clearly, it would be prudent to build out wind power, which is already cheaper in the US than new coal and which would be cheaper than NG at $8.

    If you charge a decent amount of carbon tax, the advantages of wind would become even greater.

  2. Then, there are the indirect costs of coal:
    occupational health costs, CO2, sulfur/acid rain, mercury in food, water consumption, adding up to $.18 per kWh ($345B/year):

    "The United States' reliance on coal to generate almost half of its electricity, costs the economy about $345 billion a year in hidden expenses not borne by miners or utilities, including health problems in mining communities and pollution around power plants, a study found.

    Those costs would effectively triple the price of electricity produced by coal-fired plants, which are prevalent in part due to their low cost of operation, the study led by a Harvard University researcher found.

    "This is not borne by the coal industry, this is borne by us, in our taxes," said Paul Epstein, a Harvard Medical School instructor and the associate director of its Center for Health and the Global Environment, the study's lead author.

    "The public cost is far greater than the cost of the coal itself. The impacts of this industry go way beyond just lighting our lights." or

    or here's the link to the pay-wall-protected version if desired:

  3. Nick:
    Unfortunately there are parts of the country (and the world) where wind doesn't work - I happen to live in one.

    However the local university, as I have noted, has just closed it's coal fired power plant and moved over to geothermal and natural gas.

    Unfortunately such options are likely not available for the poorer nations of Asia and Africa which will continue to, and likely to increasingly use coal as a cheaper indigenous source than more expensive imported alternatives.

  4. Nick G Its apparent you are smart and concerned for the environment. I applaud your intents. As I am sure you understand wind power requires a minute ready back up. So for a power generation build whatever percentage is wind power a equal percentage has to be derived by another source that can be turned on in an instant.
    It is amazing that some of the ardent environmentalist have come to the conclusion nuclear is the only realistic answer. They understand the base load issues with solar and wind, hate coal and don't like wind power's ill effects on the environment.
    As you suspect nuclear has a high hurdle to jump before it becomes publicly acceptable, no matter what advances have been made to its use.
    The issue most people don't come to grips with is the fundamental nature of cheap energy production, without it society will incur a truly terrific trauma.

  5. HO, I think you do have wind power available.

    "According to the National Renewable Energy Laboratory (NREL), Missouri has enough wind to capture as much as 275,000 megawatts of power – nine times the state's current electricity capacity, or enough to easily meet the state's total annual demand for electricity.[3] Many of these windy plots are relatively close to St. Louis or Kansas City, which brings down the cost of transmitting wind energy. Harnessing just a fraction of Missouri's wind power would result in a major new source of income for many farmers and rural communities. The average 269-acre Missouri farm [4] could host three to four wind turbines and bring in $18,000 to $24,000 annually from land lease payments.[5]"

    On the other hand, sure, some areas don't have wind, but many don't have coal area either.

    "Missouri's conventional fuel resources are slim, and energy dollars are streaming out of the state. Missourians spend about $3,000 per person each year on energy, including natural gas for heating, fuel for cars and trucks, and electricity for homes and businesses.[1] Eighty-two percent of the state's electricity comes from coal, nearly all of it shipped from Wyoming."

    The poorer nations of Asia and Africa really have enormous wind, solar and hydro resources...

  6. Bruce,

    whatever percentage is wind power a equal percentage has to be derived by another source that can be turned on in an instant.

    The same claim could be made about anything: there is no form of power that doesn't require backup, per standard ISO requirements. Yes, windpower has more variance than other power sources, but there are a wide variety of ways to deal with it: windpower is roughly as variable as consumer demand, for whose "intermittency" a variety of strategies have been developed: pooling of a number of units, Demand Side Management, overbuilding, long distance transmission (for wider pooling), diversity of sources, forecasting (variance isn't the same thing as unpredictability), etc.

    Backup is relatively expensive, so an optimal system will use other things first. Backup has a place, but we shouldn't exaggerate it - it's not really the primary strategy (unless, of course, you're a regulated utility with guaranteed capital ROI, in which case you may well build generation way past the optimal point....).

  7. Nick,
    I have worked with people who have actually run the numbers for different parts of the state, and while we have a couple of small demonstration turbines in town for experimental reasons, I stand by my comments - based on their data.

  8. Have they published their data? It's not very useful to anybody, and it's hard to double check, if it's not published. Further, it's hard to understand such a large gap: 275GW from the NREL versus "wind doesn't work".

    In any case, Missouri imports almost all of it's coal - why not import wind power instead?