Sunday, March 25, 2012

The Economics of Baseload Power Generation

There are three main types of power plants, as far as the quality of the electricity they generate: baseload, peak following, and intermittent.
Intermittent power plants (wind and solar) typically have high upfront capital costs, but have low reoccurring costs, such as fuel  or O&M. This means means that once they are built, they typically generate electricity whenever the wind is blowing or the sun is shining. Then, there are the baseload power plants. These are typically nuclear and coal power plants. They are typically also capital cost heavy and Fuel/O&M light, so once again they normally generate electricity continuously because they can compete in the electricity market at almost any price. And then there are the peak following power plants: natural gas and hydroelectricity. Peak following plants are normally capital cost light and fuel/O&M heavy, and so they only turn on when electricity prices are highest. However, we now face the fact that natural gas, in most of the US, is so cheap that natural gas can replace coal and nuclear as the fuel for baseload sources of electricity.
This means that we are living in the middle of an energy revolution, and I think that it will still take a few years for the US to understand the implications of this energy revolution. Nobody, and I mean nobody, predicted a few years ago that natural gas prices would drop to $2.20/MMBTU. While this drop in price is due to a lot of causes (including the warm weather on the East Coast), this drop in price is due in part to the abundance of shale gas wells being drilled across the US. This was an energy revolution that took place despite the actions of the current administration and the current Federal Reserve board. In fact, the 2008 Stimulus Package was a direct attack on shale gas (hardly a single penny of the stimulus package went to Shale Gas development…it went to solar cells, wind turbines, biofuels, batteries, CO2 sequestration, CO2 re-use,  and geothermal.) It didn’t go to shale gas development and it crowded out the market for investment. Instead, we wasted a lot of money, time and work on projects that would be completely uncompetitive in today’s market had they not be subsidized.
This money, time, and work should have been invested in drilling more wells and developing technology to convert natural gas into gasoline. I think that people would have invested more of their own money into shale gas development had interest rates been higher. The zero-interest rate policy and the stimulus package were major and collective failures on the part of the government. No one person should be blamed for this, especially because the government was in part getting advice from companies that donate to both political parties (such as GE, major banks, etc.) Why did GE and the major bank suggest or allow the government to spend so much money on solar cells, wind turbines, biofuels, batteries, CO2 sequestration, CO2 re-use,  and geothermal? GE and the major banks must have been smart enough to realize that they will be paying for these projects in one way or another (directly by taxes or indirectly via inflation.) So, I don’t want to just blame President Obama, Secretary Chu or Chairman Bernanke. This was a collective failure to understand and to appreciate the vast natural gas resources in this country, and a failure to appreciate the need to develop technologies that pull out the higher hydrocarbons or convert natural gas into gasoline. We are all somewhat to blame here.

But now we know that natural gas is abundant. So, we need to act appropriately in the future. We can’t go back to the Utopian mindset that wind turbines, solar cells, and biofuels will save the planet from destruction and save our society from catastrophic collapse. The goal of this post is to discuss the implications of cheap natural gas prices, and to look at what are the chances that we will build new coal power plants in the US in the future, and if so, what type of coal power plants. In fact, natural gas prices are so low that virtually the only power plants being built (without subsidies) are natural gas and hydro-electric power plants. Using data from the Department of Energy, the question I’ll address here is: what would have to be the price of natural gas or the price for emitting carbon dioxide in order for coal power plants to compete against natural gas combined cycle power plants?
Before making speculations about the future, I’d like to look at the past records of the construction of coal power plants. The data shows that there was massive construction of coal power plants between 1966 and 1986. There was a large gap between 1996 and 2006 in which there was virtually no coal power plants being built in the US, and then starting around 2006, construction of projects started again. If you look at the following graph from the National Energy Technology Laboratory (NETL), you’ll see that completion of new coal power plants has rapidly dropped since 2011. The spike in coal power plant construction in 2009 and 2010 was only a few years after the massive price increase of natural gas in and around 2006.  ( See  for natural gas prices during the last decade.)
So, while I don’t normally like to speculate about the future of specific technologies, I’d like to make some educated guesses as to what type of power plants will be built in the US in the future (knowing that predictions are almost always wrong.) Starting with a graph made recently by NETL on the cost of electricity (COE) of various baseload power plants, I added some boxes with likely and possible future prices of natural gas and CO2 emissions. First, the blue oval is where we are today. The Henry Hub natural gas price is approximately $2.30/MMBTU, and the price of emitting CO2 is zero (unless your company is linked to the Kyoto Protocol and has to pay roughly $10/tCO2 emitted.) With prices in this range, the lowest cost of generating electricity is from a natural gas combined cycle power plant (NGCC) without CO2 capture and sequestration (w/o CCS). According to the NETL calculations, for CCS to make sense on a NGCC power plant, the price of CO2 emissions would have to be above $70/ton-CO2, which is an unlikely scenario anytime in the next few decades.  Also, a traditional pulverized coal power plants will not make economic sense until the price of natural gas goes above $6/MMBTU (if coal prices remain constant.) The question is: what would have to happen in order for coal gasification with CCS to be economically viable? First, it depends on whether the power plant is built with today’s technology or is built with advanced H2&O2 separation membranes. (Note that these technologies are promising, but are only currently at the lab or pilot plant scale.) With today’s technology, the price of natural gas would have to be above $10/MMBTU and the price of CO2 emissions would have to be above $70/ton CO2. With advanced H2&O2 membranes, the price of natural gas only needs to be above $6/MMBTU and with the price of CO2 roughly above $20/ton CO2. sequestration (IGCC-CCS) to make sense?

       So, let’s make an educated guess of what will likely happen in the future. The likely future is that the price of natural gas will increase slightly as more vehicles and power plants switch from gasoline and coal to natural gas. I don’t expect to see the price of natural gas to increase rapidly in the future because there are a lot of places left to drill in the Marcellus shale in New York state as well as in the Utica shale (which lays below the Marcellus.) The Utica shale will obviously be more expensive than the Marcellus to drill in most places, but it will act like a valve keeping prices from soaring too high. And in the near-term, the price of CO2 will probably remain between $0-$15/ton CO2 because the short-term impact of increased CO2 emissions is positive (warmer winters, navigable Arctic ocean, crop fertilization, etc…). The negative impacts of global warming don’t set in until after roughly another 2 oC raise in global average temperature.
In the long run (i.e. 20-40 years down the road) I have no clue what will be the price of natural gas. It could be $10/MMBTU or it could remain $2/MMBTU. The price of CO2 emissions is likewise highly uncertain. Though, it doesn’t appear that the price in the next 20 or so years will reach much higher than $30/tonCO2 because a) the net environmental/economic damage is will not set in until temperatures warms by at least 2 oC, b) there are cheap methods of reducing temperatures by introducing dust or mist into the atmosphere, and c) there are many other ways that we could lower CO2 emissions that cost less than $30/tCO2.
So, I don’t see any scenario in which traditional IGCC or IGCC-CCS can compete economically. However, there are a lot of governments (including the U.S., China, Australia) that are pouring billions of dollars into traditional IGCC-CCS power plants research, development and construction. The amount of money going into advanced IGCC-CCS power plants is quite small in comparison. 
I think that any of us who are prone to overreaction about the climate debate (on either side of the debate) need to calm down. Let’s not over-hype or under-sell the impact of global warming, and let’s not over-hype or under-sell the impact of GHG regulations. Global warming is real, but not catastrophe any time soon. Likewise, implementing GHG regulations will be economically damaging, but it will not be catastrophic because, in addition to abundant natural gas, there are a lot of ways of converting fossil fuels into hydrogen and compressed carbon dioxide for sequestration. We need to let scientists and economists conduct research in this field without fear of the results that they obtain.
Natural gas combined cycle power plants and propane/hybrid/electric vehicles are the bridge to an economy with less global CO2 emissions. We need natural gas as a bridge until we can develop advanced IGCC-CCS power plants (such as the ones with H2 and O2 membranes mentioned above.) I think that we have bought ourselves roughly 20-30 years to develop advanced coal power plants that generate H2 and sequester CO2. In the US, we need to eliminate subsidies for those technologies that can’t compete again natural gas in the short-term and adv IGCC-CCS in the future. (This doesn’t mean that we shouldn’t be funding basic science and engineering in this fields…it just means that we should eliminate the subsidies and feed-in tariffs for wind, solar, and nuclear.) 
 The future is uncertain, but one thing is certain: we don’t need subsidizes for wind, solar and nuclear plant. I have nothing against solar, wind or nuclear, per se, if these technologies were competing in the free market. There is abundant coal and natural gas in the US, such that coal and natural gas will supply the majority of electricity in the US, regardless of the price of CO2 emissions. Remember that we already have the distribution network for coal and natural gas. If CO2 regulations were to be implemented in the future, then we can retrofit coal and natural gas power plants and build new pipelines for compressed CO2. This will likely be cheaper than building new solar or wind turbines (along with the associated energy storage devices.) But when I say retrofitting coal power plants, I don’t mean post-combustion capture. I mean adding in coal gasifiers, H2-separation, and gas turbines, and then using the existing heat exchangers, steam turbine and power equipment from the old power plant. Remember, new solar and wind turbines plants aren’t just competing against new, green-field fossil fuel power plants, they are also competing against retro-fitting existing or already shut-down fossil fuel power plants. The best business case in the near term is to retrofit existing power plants for natural gas, and in the mid-term, the best business case is retrofitting existing power plants to natural gas or coal with hydrogen separation membranes. Which of these fossil fuel power plants to build will depend on the ratio of natural to coal prices and the price of CO2 emissions, as shown in the NETL graphs above.


  1. The Wall Street journal just wrote the following article on the EPA and possible rules against greenhouse gases from new coal power plants.

    As this article points out (if these rules do go into effect), new coal power plants will still be viable if advanced O2 and H2 membranes are commercialized and if natural gas prices increase.

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