Coal, Gas

AGA disagrees with studys conclusions

Issue 3 and Volume 99.


Douglas J. Smith,

Senior Editor

AGA disagrees with study`s conclusions

A Energy Ventures Analysis Inc. (EVA) study conducted for the Center Energy and Economic Development said that natural gas will be the preferred fuel for electric power generation in the 1990s. However, this will be reversed in the post-2000 period. EVA?s conclusion is that coal will become the dominant fuel as we enter the next century.

The American Gas Association (AGA) does not agree and said that the EVA study is based on questionable logic and assumptions. AGA also said the study does not reflect many of the fundamental structural changes that have occurred in the natural gas industry and other energy markets during the past 20 years.

According to the AGA, natural gas has become the primary energy source for powering new electricity generating plants in the United States. The AGA believes that roughly 60 percent of the new electric capacity to be added in the 1990s will be natural gas-fired. Coal will account for 10 percent to 15 percent of the market.

EVA?s analysis is based on a life-cycle comparison of gas and coal-fired generating plants constructed after the year 2000. The study calculates a break-even fuel price differential. This differential estimates how much the gas costs can exceed the coal costs. Over the lifetime of the plant, coal would be more economic when the differential is high while gas would be more economic if the fuel price differential is low.

AGA objects to EVA assuming a capacity factor for coal-fired plants of 70 percent when they use a capacity factor of only 50 percent for natural gas-fired plants. In their arguments, AGA cites capacity factors published by the National Coal Association that say coal-fired power plants have average capacity factors of 55 percent.

AGA said that reducing the capacity factor of power plants is more detrimental to the economics of coal-fired plants than gas plants. The reason for this is the fixed costs of a coal plant are two to three times that of a gas-fired power plant.

The EVA study would increase the operating costs of a coal-fired power plants by almost 25 percent if the plant?s capacity factor was reduced to 50 percent. According to AGA, reducing the capacity factor to 50 percent would result in a break-even fuel price differential of more than $3.00/mmBtu.

Another AGA concern is the coal and natural gas price assumptions made by EVA in the study. The price of coal used in the study is EVA?s price projections while they use an average of several price forecasts for determining the price of natural gas. If EVA had used its own natural gas price forecast it would have reduced the well-head price of natural gas in 2010 by nearly 20 percent, said AGA.

Natural gas reserves

AGA reports that the United States has proven gas reserves of approximately 155 trillion cubic feet (Tcf). In addition, there are 753 Tcf of resources that can be produced using current technology and economics. In the lower 48 states there are gas resources of more than 900 Tcf available.

Besides mainstream gas resources, AGA said the United States has additional gas resources including Eastern Devonian shales, Western tight sands, coal seam methane and enhanced gas recovery. Enhancements in technology will result in these supplies becoming part of the mainstream gas resources. According to AGA, some of the resources mentioned are already being produced commercially including 1 Tcf per year of coal seam methane.

AGA takes issue with EVA in that it mentions technology and productivity advances that affect coal production and transportation. However, EVA ignores the potential for technology to affect natural gas exploration, production and access to resources. Another concern of AGA is EVA?s assumption that the cost for transporting coal will decline by approximately 30 percent while the cost for transporting natural gas could increase by 65 percent.

The EVA study acknowledges that natural gas-fired power plants are more efficient and less costly to build and operate than coal-fired plants. However, EVA?s assumption that the spread between the delivered gas and coal prices in 15 years will be three times today?s spread is open to discussion. Fuel cost projections are not a science.

For example, the Department of Energy (DOE) and AGA 1995 gas wellhead price projections have varied widely and only recently have maintained a consistent relationship relative to each other. In 1983 AGA projected that in 1995 the well head price for natural gas would be $5.43 (per million cubic feet in 1993 dollars) while the DOE projected the 1995 price would be $11.34.

According to DOE estimates, at current production rates the United States has a 60-year supply of natural gas. When non-conventional supplies are considered, the United States? natural gas supply base increases to 200 years. Many advocates of natural gas believe that if advanced technology is used in exploration for new natural gas reserves, there would be almost no limit to the supply.

The market for natural gas looks promising with the demand for natural gas continuing to grow during the next two decades. By 2010, AGE expects the demand for natural gas to reach 26.1 quadrillion Btu with industrial and utility electric power generation continuing to be major users. END