Wednesday, January 25, 2012

Falling Prices of Natural Gas and Electricity... Ideas for Lowering the Cost of Driving


The national average price of electricity in 2011 was close to $100/MWhe. (or $28/GJ). This price includes generation, distribution and transmission costs. The price of electricity had been increasing steadily over the last decade, but it now is decreasing because the abundance of natural gas has caused the price of natural gas to plummet. This is a good thing, and if we had an energy backed currency, then this would mean that the Federal Reserve has the right and the duty to print money in order to maintain a constant price for the generation of electrical and mechanical work. The money that the Federal Reserve prints could be given to the US gov’t to lower its debt, or it could be used to make loans to businesses. This is how an energy backed currency is supposed to work…as prices start to drop, the Federal Reserve should print money (or lower interest rates) and if prices increase, then the Federal Reserve should remove money from circulation (or raise interest raises.) Of course, our current Chairman seems to be really good at the printing money, but not good at the removing currency from circulation. (In fact, most Reserve bank chairmen are better at printing money than removing money…and that’s why we almost always have inflation, and almost never have deflation. 

As I've stated before, I don't have a problem with the Federal Reserve printing money when the prices of mechanical and electrical work decreases (especially if it's due to technological innovation...such as horizontal drilling in tight shale formations.) It'll be interesting to see if Ben Bernanke starts printing money or whether he decides to allow prices to deflate in order to make up for the >2%/yr inflation over the last ~6 years.

 
In this post, I want to point out why natural gas prices have now reached the point in which baseload electricity prices are dropping in the US, and I want to discuss the impact that falling natural gas prices might have on the type of vehicles we drive. I’ll start with the impact on electricity prices, and then discuss vehicle transportation.

Today, the price of natural gas at major pipelines is now roughly $2.50/MMBTUch, which is roughly the same as $2.50 per GJch. (Note the conversion here is luckily just 1 kJ ~ BTU, and note also that I’m placing the subscript ‘ch’ after the energy unit to denote that this is the chemical energy in the fuel…its HHV. This will be contrasted with the subscript ‘e’, which stands for the actual amount of electricity that is generated.)
The day-ahead base-load generation price in the PJM is currently sitting around $25/MWh ($7/GJe). The marginal cost of the fuel is roughly $5/GJe ($2.5/50%), so owners of natural gas power plants that have already been built and paid off can make a profit by running their NGCC power plants even if the price of electricity is only $25/MWh ($7/GJe).  Though, you can do a quick calculation to show that there is currently no incentive in the PJM to build a new baseload natural gas power plant because the difference between the marginal price of fuel and the electricity prices is not large enough to get any more than a ~1%/yr internal rate of return on investment from the plant. (To do this calculation, use the following rough estimates: Capital Costs for a combined cycle natural gas power plant are roughly $650/kW of maximum power generation, baseload availability ~80%, ~50% efficiency of chemical energy into electricity, reoccurring labor costs are ~ $15/kW/year, and the lifetime of the plant is ~ 20 years. Using these values and prices of fuel/electricity listed above, you should calculate an IRR of ~1%/yr.) The incentive is there to build a new base load NGCC power plant in some other markets because, depending on the time and location in the US, the actual price of electricity varies between $5 and $100/GJe.

On the other hand, the price of crude oil is roughly $100/barrel or $16.3/GJch. This means that there’s a factor of six difference in the cost per chemical energy of gasoline compared with natural gas. This is pretty absurd, and it’s one reason why we should start to see more vehicle owner convert their cars over to natural gas liquids (such as propane.)
 It seems plausible that a business could sell membrane equipment to homeowners so that people could separate propane & butane from natural gas. The large difference in price/GJch means that there’s huge potential fuel savings if one could purchase relatively cheap equipment to pull propane/butane from the natural gas that you use in your home anyways. (You would then use the methane and ethane in the natural gas in your home for heating/cooking/etc…) Converting your car to propane/butane is really simple because you only have to change the tank…not the engine. (I would only do this once your warranty expires, though.) Propane/butane mixtures only need a pressure of ~10 atm in order to store them as liquids at 100 oF, and tanks that can handle pressure to 10 atm are pretty cheap to purchase. I think that this will be a better business model than Honda’s CNG (compressed natural gas) vehicles because the natural gas in their cars is not stored as a liquid…it’s stored at 35 atm…which means that you only have a driving range of only 200 miles in a small car. Whereas with propane/butane as your fuel, you can drive an SUV and get 300-400 miles range with the same size tank as your current gasoline tank. What we need is a) more locations to fill up our cars with LPG [liquid petroleum gases i.e. a mixture of propane/butane] and b) the ability to fill up at home by pulling the propane/butane from the natural gas we are already using at our homes. (Check out these links  to see the type of separation membranes required to pull C3 & C4 hydrocarbons from natural gas. The problem is that natural gas is only ~1% propane+butane (~2-3% on an energy basis), so you have to use a fair amount of natural gas at your home in order to pull out the ~2-3% C3/C4 hydrocarbons.) In the winter, I use roughly 20 GJ per month of natural gas, which means that I could pull out (assuming perfect separation) roughly 0.5 GJ of propane+butane. In a month, I use 30 gallons of gasoline (or 4.4 GJch). So, there’s clearly an order of magnitude difference between the amount of propane/butane I would need for my vehicle, and the amount I could pull from the natural gas I use in a typical winter month. So, while there’s definitely a major question of how to reliably get the LPG, there’s a major driving force that will be pushing us towards using LPG in our vehicles, and that’s the factor of six difference between the price of gasoline and the HH price of natural gas on a chemical basis. The question is: when will we start to see the price of gasoline start to drop, now that natural gas prices are so low?

One thing is clear, and that’s the fact that it makes absolute no sense to use crude oil in combined cycle power plants. For a 50% efficient power plant running on crude oil, the price of fuel is ~$33/GJe. This is above the national above price of electricity, and it’s five times higher than the day-ahead generation price of electricity in the PJM (mid-Eastern US.)
Also, if a car is only 25% efficiency in converting chemical energy into mechanical work and if gasoline costs $4/gallon or $27/GJch, then the marginal price of fuel in that car is $110/GJmech  or  $395/MWhe .This is four times higher than the national average price of electricity. So, if it weren’t for the price and range issues with today’s battery cars, we would have moved over to electricity for personal driving a long time ago.
So, we now have two major driving forces towards moving away from gasoline…the low price of natural gas and the low price of electricity. It’s only a matter of time until we figure out how to lower the price of driving by some combination of LPG and batteries.
Let me know what you think about the idea of pulling propane/butane from natural gas at your home and using that fuel in your vehicle. Perhaps, it would make better economic sense at the scale of a Sam's Club or a Costco with its own LPG & gasoline station. [Free membership and discounts if you convert your car to LPG!] Now that's an idea that Sam's Club & Costo would be interested in because they would be the main distributors of LPG, and hence they would be likely to make a lot of money selling the LPG because of the huge price difference between natural gas and gasoline. (And, look, no gov't subsidies required!)

--Eddie


Also, here are some handy conversion factors I used in this post

6.13 GJ in a barrel of oil equivalent

Gallon = 0.0238 barrel of oil

Gallon = 0.146 GJ

1 kJ ~ 1 BTU

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