WHY NATURAL GAS CANNOT REPLACE COAL BASED GENERATION

1. WHY NATURAL GAS CANNOT REPLACE COAL BASED GENERATION Frank Clemente Ph.D. Senior Professor of Social Science & Energy Policy Penn State University fac226@psu.edu 814-237-0787 1

2. Consequences of the first “Dash to Gas” • 1997: “if Lower-48 proved gas reserves are reported to EIA with reasonable accuracy, and inferred reserves as assessed by the Department of the Interior prove generally reliable…by early in the next century, natural gas will have become more of an energy problem than an energy solution” (Joseph Riva, Colorado School of Mines) • 2008: “Construction of natural gas fired power generation in the last decade has placed an unreasonable strain upon the US natural gas system. Natural gas must be used to meet new electricity load growth…this unfettered demand growth appears to have come at the expense of other consumptive sectors” (Credit Suisse Bank)

3. Background The GAO is examining the ability of coal based generating units to switch to natural gas (NG). The GAO focus is on the state of knowledge and addresses three broad topics: • Technical process and feasibility • Energy feasibility in terms of supply and implications for demand • Economic consequences and costs. • Note: Topics 2 and 3 are covered here.

4. What GAO has already found regarding NG Prices, Demand and Supply (2006) “Since 1999, wholesale prices for natural gas have trended steadily upward due to expanding demand—largely for electricity production” “Supply has not kept pace. The domestic natural gas industry has been producing at near capacity, and the nation’s ability to increase imports imports has been limited” “This tightness in the supply and demand balance has also made the market susceptible to extreme price changes” “The effect of high natural gas prices has already been especially severe on low-income individuals” “High natural gas prices are also adversely affecting industrial consumers ..some shut down production facilities” Source: “Natural Gas: Factors Affecting Prices and Potential Impacts on Consumers”, GAO, 2006 4

5. The Scale of the Issue Coal Provides 50% of U.S. electricity – 2,000 billion kWh Prices are moderate and stable Reserves are abundant and accessible Production has increased 8% since 2000 Supply is secure and domestic Natural Gas Provides 20% of U.S. electricity –800 billion kWh Prices are 4 times higher and 20 times more volatile than coal Reserves are suspect and ever further afield Production has decreased 4% since 2000 Supply will be increasingly dependent upon questionable foreign producers—43% of global NG reserves are in Russia and Iran

6. The Rising Tide of Electricity Demand in the U.S. 6 Source: EIA

7. Previous Research and Analyses of Fuel Switching Most studies of fuel switching have focused on oil to NG. The few relevant examples from the literature have concluded switching from coal to NG would either be impossible or prohibitively expensive: Linden (2006): ”the feasibility of replacing the existing 311GW of U.S. coal fired steam electric capacity…with natural gas combined cycle capacity…simply would not be economical” Goldman Sachs (2007): ”If no new coal plants are built, natural gas prices will skyrocket” National Petroleum Council (2007) – “ with...the gas consumption of ‘1/2 Coal goes to Gas’ scenario...significant price changes in natural gas would occur”…

8. Demand for NG to Produce Electricity if we (a) Replace Coal with NG and (b) Follow EIA Projections 8 • Source: adapted from EIA data and internal calculations

9. NG Required by U.S. if Coal Based Electricity replaced with NG • Note: To put 44 TCF in perspective, it is more NG than Europe, Asia, Africa and South America use combined. • Source: EIA data and forecasts; calculations performed for this graphic 9

10. Ten Reasons Why NG Cannot Replace Coal Based Generation Stagnant Production despite substantial increases in drilling --Depletion is rampant and running over 60% in some fields. EIA projects no lower 48 production growth over the next 20 years. Canadian imports are declining as Canada faces both depletion and rising demand from oil sands production. Imports from Canada were 3.1 in 2005 but are projected to be only 2.0 in 2015 – a decline of 35% in just a decade. Alaskan pipeline may or may not be built but EIA projects no significant flow before 2020. Even that relatively optimistic amount of 2.4 TCF/Y is needed to meet the “business as usual” case for growing NG demand. LNG imports cannot be scaled up enough to meet additional demand. EIA’s projection of 2.5 TCF in LNG imports by 2015 is questionable but, once again, this amount required to meet BAU case.

11. Ten Reasons (Cont.) 5. LNG prices will escalate as producers (e.g. Qatar) seek to link new production with oil prices. Liquefaction costs have steadily increased at the global level, resulting in significant deferrals, cancellations and inaction in producing nations. Competition for LNG and distance from producers will keep the U.S. as the “market of last resort”. The EU, for example, is projecting 130-160 GW of new NG generation amidst declining North Sea production. 7. Demand from existing and planned NG power plants will steadily increase as NG increasingly serves as baseload generation.

12. Ten Reasons (Cont.) 8. Demand from other societal sectors will be a steady drumbeat with over 50 million NG heated homes, hundreds of new ethanol plants and increasing industrial application. Experience has shown that increases in NG consumption for power generation (e.g. 2000-2006) escalate prices by creating internecine competition with other users such as homeowners and industry. The supply/demand balance that exists today was achieved by higher prices destroying demand in the industrial sector. Reliability warnings for the next decade have already been issued by NERC. Replacing our most secure electricity source with one of our most questionable and costly sources has significant implications for electric power supply adequacy. .

13. More Wells and Higher Prices Have Not Increased NG Production 13 13

14. Forecasts Do Not Indicate Significant Increases in NG Production

15. 2000- 2005 15

16. 16

17. If Alaskan Pipeline Not Built, LNG Must Make Up the Difference 17

18. LNG Imports Needed to Replace Coal with NG 18 * Assumes Alaska pipeline delivery 2.4 TCF/Y; ** Assumes no Alaskan pipeline

19. IF WE IMPORTED 19.7 TCF of LNG By 2015: • 25 times more than we imported in 2007 • 8 times more than EIA currently predicts • 53% of projected world supply in 2015 • 6 times more than we import from Canada • 7 times more than produced in Gulf of Mexico • As much NG as all of Europe used in 2006

20. What We Pay for LNG Now and Will Pay if NG Replaces Coal • For perspective, if NG replaces coal generation the cost for LNG from 2015-2030 would be over 3 trillion dollars with • Projection based on NYMEX Future Strip to 2013 20

21. Emerging Competition for LNG : 21

22. Warnings on LNG Dependence • “North American gas production is inadequate to meet demand. We are in competition with other importing regions of the world for LNG supplies. And we are not predestined to prevail in that competition” ( Joseph Kelliher, Chair of FERC, 2007) • “Importing LNG from abroad opens the U.S. fuel supply to the global market and all the economic and political risks associated with it” ( NERC,2007)

23. Recognition at EIA: Downward Revisions of LNG Import Forecasts for 2025 Source: AEO, EIA

24. The Drumbeat of NG Consumption For Electric Power Generation

25. The Price of NG to Produce Electricity has increased 110 % since 2002 25

26. More NG for Electricity means higher prices

27. Coal has Buffered Millions of Consumers from Even Higher Electricity Prices 27

28. ELECTRICITY PRICE INCREASES AND MANUFACTURING JOBS 28

29. The Burden of Higher NG Prices is a Societal Issue but Falls Most Heavily on Three Groups Manufacturers and their employees – chemical, plastics, glass, fertilizer, paper, machinery etc. Blacks in poverty – about 10 million people Female Heads of Households in poverty and their children – 4 million families GAO (2006): “The effect of high natural gas prices has already been especially severe on low-income individuals.” “High natural gas prices are also adversely affecting industrial consumers… such as fertilizer and chemical manufacturers.” 29

30. Reliability-- One Example Of NERC’S Concern: Erosion of Generation Capacity Margins in Southwest U.S. 2004 - 2016 30