Coal

Edison Electric Institute weighs in with Senate committee on natural gas supply issue

July 10, 2003 — The Edison Electric Institute (EEI) and its Alliance of Energy Suppliers submitted a statement to the Senate Committee on Energy and Natural Resources for its July 10 oversight hearing on natural gas.

The committee convened the full meeting to discuss the reasons behind the high price of natural gas, its effect on the economy and to consider potential solutions.

EEI is the trade association of the U.S. shareholder-owned electric utilities and affiliates and associates worldwide. The Alliance is a Division of EEI that focuses on the generation business and related wholesale issues in the supply of electricity.

EEI will address three main issues in this statement. First, generators use natural gas because it is a relatively clean, efficient, and cost-effective fuel, and gas-fired generators are easier and faster to build than other types.

Second, federal policies should facilitate increasing the supply of natural gas and must provide greater certainty for the use of other fuels. These include provisions related to transmission siting and Clear Skies legislation. Congress should also fully fund LIHEAP to assist low income consumers with their energy usage.

Third, there should not be arbitrary restrictions on the use of natural gas to provide electricity to consumers.

Throughout America, people are paying attention to the price of natural gas. Whether it is the homeowner who uses natural gas for heat, the fertilizer manufacturer who uses natural gas as a feedstock, or the electricity generator whose operating costs are substantially influenced by the cost of natural gas, all are paying careful attention to the current cash and forward prices of natural gas.

EEI appreciates the opportunity to submit written testimony and to address the concern that generators have with the current and foreseeable imbalance between natural gas demand and supply.

Short Term Recommendation: Improve Energy Efficiency

There are some useful short term actions the federal government can take to address end-use efficiency of natural gas. For example, through the Energy Star program, the government can promote the purchase of high-efficiency gas furnaces and boilers for those homeowners and businesses with old systems that need to be replaced. For homeowners with gas water heaters, the government can educate consumers about the new efficiency standards that will take effect in January, 2004, and help consumers find units that exceed those standards. For consumers and businesses with newer equipment, there should be promotion of tune-ups before the winter season or the lowering of thermostats where possible (e.g., down to 120 F or lower on gas water heaters and below 68 F for gas furnace/boiler systems).

For homeowners with gas water heaters and older water using appliances, the Energy Star program can be used to promote Energy Star dishwashers and clothes washers, which significantly reduce the usage of hot water. In addition, the government could encourage people not to purchase cooking equipment with continuously burning standing pilot lights.

The government can also “lead by example” by making sure that gas-fired equipment at its facilities are well-maintained, that new equipment purchased exceeds Energy Star standards, and that all thermostats and setback controls function properly.

Long Term Recommendation: Increase Supply

While we believe there are limited opportunities regionally for reducing short term demand for gas in our sector – primarily by encouraging large industrial users to shift some of their use to off-peak times of consumption – there are longer term solutions for assuring adequate natural gas supplies in this country.

These include efforts to encourage the wise use of energy and careful policies to identify, tap and bring to market available known reserves and new sources – both here and abroad. It is the combination of increased supply and the efficient use of that resource that will result in lower natural gas prices. EEI recognizes that the current natural gas situation did not develop overnight, nor will it be resolved overnight. We recommend that the Nation embark on a program to augment natural gas supply through the following:

(1) prompt passage of enabling legislation to allow certification of pipeline capacity for Arctic natural gas. This will enable market signals to determine when and how Arctic gas will make it to markets in the lower-48;

(2) increased domestic production of natural gas where there are proven gas reserves, including, where appropriate, onshore and offshore federal lands that are currently off limits. We recognize that this step will be politically difficult, but as Federal Reserve Board Chairman Alan Greenspan pointed out in his testimony before the House Energy Committee on June 10, Congress must find the appropriate balance in energy and environmental policy that will assure to the American economy and the American people low-cost, competitive energy while protecting the environment;

(3) rapid approval by the Department of Energy of Liquified Natural Gas (LNG) import applications, coupled with streamlined certification of infrastructure projects (LNG terminals and requisite pipeline facilities) by the Federal Energy Regulatory Commission (FERC) and the U.S. Coast Guard and, as important, timely approvals by states under the Coastal Zone Management Act and the Clean Water Act;

(4) development of deepwater resources throughout the Gulf of Mexico; and

(5) advocacy of vigorous conservation programs for residential, commercial, and industrial users of natural gas through federal, state, and utility-delivered programs designed to utilize natural gas more efficiently. For example, well-maintained and tuned- up furnaces and boilers can help reduce natural gas demand by more efficient applications, thereby having a positive impact on supply.

Long Term Recommendation: Enhance Fuel Diversity and Infrastructure

The electric power industry is searching for ways to continue the production of low-cost electricity essential for the United States to compete in a global economy. From our perspective, one of the most important steps Congress and the President can take is to advance federal policies that will assure the availability of an adequate and diverse fuel supply for the generation of electricity.

Fuel diversity means that coal, nuclear, hydro, wind, solar, natural gas – and other fuel sources as they become available – can be used by generators of electricity to mitigate price or supply risk in any one source. It also means “fuel switching” or maintaining a “dual fuel capability,” where natural gas-fired plants are constructed. Permit conditions should be developed that allow for switching between natural gas and oil products in times of either high prices or limited natural gas supplies.

Policies advanced by the Congress and the Administration need to maximize the diversity of fuel sources available for the generation of electricity while allowing market forces to dictate the choice, in any given circumstance, of how to assure the low-cost production of electricity.

Fuel diversity needs to include the ability to move large blocks of power between regions so that diverse electric supplies can move into various regions. For example, the potential of wind development throughout The Great Plains is limited by a lack of high-voltage transmission lines to carry the abundant raw resource to markets, either East or West. A more robust transmission system would expand inter-regional powerflows, providing a more diverse generation mix to regions that now have limited fuel options.

Stimulation of investment in transmission will do little to help if permitting and siting of new transmission lines continues to take more than a decade. EEI acknowledges the positive language contained in S.14 on permitting and recommends to the Senate the more specific provisions in H.R. 6, the House Energy bill.

These provisions give the Department of Energy (DOE) lead agency authority to coordinate the federal authorization process for transmission lines and establishes project specific coordination requirements. Another provision gives last-resort backstop siting authority to FERC. Together with the corridor designation provisions H.R. 6, such new provisions will do a great deal to introduce transparency into the permitting process and facilitate timely siting decisions.

As transmission is helpful in distributing electricity, a market basket of generating technologies (coal, nuclear, hydroelectric and renewables as well as natural gas) is helpful to fuel diversity and price stability. The price of converting different fuels to electricity varies by technology, but generally, the broader the selection of technologies and fuels available to the generator, the better for all classes of customers.

When hydro generating capacity is reduced by a non-functional and prolonged hydro licensing process and federal policies unnecessarily hinder the appropriate use of coal, the short fall in generating capacity must be made up elsewhere. Carefully established hydro and coal policies that allow these fuel sources to continue to play a serious role in the nation’s fuel mix will help alleviate pressure on natural gas supply. EEI vigorously supports the licensing provisions of Title III of the Senate Energy bill because they will improve the functionality of the hydroelectric licensing process.

The current Clean Air Act’s complex and multiple, overlapping requirements for electric power generators constrain the use of coal generation. This puts additional regulatory pressure on using natural gas to generate electricity.

The Clear Skies Act (S. 485) would reduce such pressures on natural gas by providing certainty to coal generators, while achieving roughly 70 percent emission reductions in sulfur dioxide, nitrogen oxides and mercury emissions over a timeframe that would promote immediate environmental improvements and industry stability through certain and cost-effective emissions reductions.

In contrast, both the Clean Power Act (S.366) and the Clean Air Planning Act (S.843) would severely exacerbate natural gas cost and supply concerns. In addition, current Clean Air Act New Source Review (NSR) policy and guidelines exacerbate the natural gas challenge because NSR creates great uncertainty for coal-based power generators.

Congress should be certain that federal energy, environmental and economic policies do not: (1) inadvertently create a policy climate wherein one fuel, such as natural gas, becomes the only practical option for new generation; (2) effectively preclude the use of certain abundant and low-cost fuels; or (3) sharply limiting the generators’ flexibility to select a fuel mix that can optimize the production of electricity, thereby providing low cost power to consumers.

In addition, EEI supports Congressional efforts to reauthorize and extend the production tax credits for renewable energy sources as the best means of incentivizing renewable technologies.

The Value of Natural Gas as a Fuel for Generating Electricity

Electricity is the backbone of the modern economy. Advancements in technology have increased U.S. productivity and driven growth, but technology depends on ever increasing amounts of electricity. Currently, coal generation provides 50.1% of the nation’s electricity supply, nuclear generation provides 20.3%, natural gas provides 18.1%, hydropower and other renewables provide 9.1%, and oil generation provides 2.4%.

In the past 10 years, natural gas-fired generation has been critical to providing the low-cost electricity that is crucial to assuring that the United States can compete in the global economy. Natural gas has become the default fuel for new power plants because plants fueled by natural gas are highly efficient, have predictable and short construction cycles, and produce lower emissions.

The trend was aided by the historically low cost of natural gas and the pressures on the costs of the other traditional sources of fuel for generating electricity.

While natural gas-only-fired power plants account for 18% of the fuel used by all generation nationwide, 88% of the new electric capacity built in the last 10 years use natural gas as their primary, and in many cases only, fuel. The percentage of natural gas used as fuel for electric generation will most likely increase in the future. There are good reasons for this.

First, power plants fired by natural gas have become very efficient. Combustion turbines fueled by natural gas (simple cycle) were originally designed to augment large baseload producers of electricity (coal, nuclear, and hydroelectricity). They run for brief periods of time or a few hours annually to help meet peaking requirements. By being smaller and specialized, the combustion turbine minimized the capital costs of construction and could be quickly installed.

Simple cycle power plants became especially desirable when the nation had excess baseload supply and when cost overruns were common in the construction of baseload units, particularly for nuclear projects.

During the 1990’s, the emergence of higher efficiency combustion turbines accelerated the role played by natural gas-fired power plants in the nation’s generation mix. The “Heat Recovery Steam Generator,” where waste heat from a combustion turbine is used to produce steam and turn a steam turbine – hence the term “combined cycle” – created efficiencies greater than 50% per each BTU of energy combusted.

This compares to efficiency rates of 35-40% for coal plants. Highly efficient combined cycle plants in 2003 now have an efficiency rate over 55%. Thus, some are now being used for baseload operations, rather than just for peaking or load-following.

Second, the construction lead-times for natural gas-fired generation are shorter than those for coal and nuclear plants. This benefits owners and developers by limiting the exposure of capital because there is a shorter period when costs are being incurred but no electricity is being sold.

Third, construction costs for gas-fired generation are easier to estimate and much less likely to be subject to construction cost over-runs than other types of power plants. This also makes it easier for owners and investors to take the risk of investing millions of dollars in a new power plant.

Fourth, it is much easier to get environmental permits for natural gas power plants because of their lower emissions profile relative to more traditional coal or oil units. There is also a belief in the financial community that gas-fired plants have less regulatory risk. They have, therefore, been easier to finance than other more capital-intensive types of generating plants.

Fifth, natural gas has traditionally been a relatively cheap fuel source.

Sixth, natural gas-fired units can often be sited to optimize location on both the natural gas transmission system and the high-voltage electric transmission system.

Finally, for the electric system, one crucial advantage of natural gas technology is its quick start capability and ability to move from zero output in a combustion turbine, to full power in less than an hour. A combined cycle takes longer than the combustion turbine because of the longer time required to receive power out of the heat recovery steam generator. This ability to easily “load follow” is very helpful in an industry that constantly rebalances supply to serve customers instantaneously (for voltage control purposes).

We recognize that load following presents challenges to the natural gas transmission industry that, if not coordinated with pipeline dispatch operations, can create operational difficulties. The amount of gas demanded by a combustion turbine going to full power or shutting down rapidly because of fall-off in electricity demand can create imbalances in the pipeline system.

Natural gas storage and even liquefied natural gas (LNG) helps in managing operational requirements of gas-fired generation. Further development of storage facilities throughout the natural gas market area, including LNG facilities, will be crucial to the balancing of gas supply and demand, and to electric operations.

In some regions of the country, dependence on natural gas is pronounced. For example, in the gas-producing Southwest, some utilities came to rely on natural gas as a boiler fuel for electric production when other market uses for natural gas were not well developed. Because utilities were using boilers to generate electricity, they could switch fuels from natural gas to various grades of oil for either price or supply reasons. Some of these units are now being retired, further reducing the fuel flexibility of the electric industry.

Only 24% of the 168,760 MW of gas-fired generation in operation since 1993 have dual fuel capability, and that percentage is declining. RDI’s PowerDat data base predicts that by 2011, only 7% of the 188,215 MW of new natural gas capacity planned is identified to have dual fuel capability. The figure of 188,215 MW represents 71% of total new electric generation under construction until 2011. While some new gas-fired power plants can burn oil, there are three main impediments to actually making the switch to oil.

The physical requirements of the combustion turbine, such as increased maintenance needs and possible warranty limitations from the turbine manufacturer, discourage switching to oil. Environmental permits may preclude the use of oil because of increased NOx emissions associated with the use of distillate oil (FO2). Finally, many local zoning regulations do not allow the construction of oil storage tanks.

All of these factors associated with the loss of dual fuel capability at gas-fired power plants add inflexibility to the increased demand for natural gas in generating electricity. The increased demand, along with weather conditions, economic growth, and increased end use demand for natural gas -such as the 70% of new homes that are built each year with natural gas heating systems, can contribute to higher natural gas commodity prices and greater price volatility.

The United States benefits from robust and diverse natural gas supplies. Congress, the Administration and the FERC should publicly encourage the development of new production, new pipeline capacity, and market-area storage to assist in meeting the demand of the electricity producer and other end users of natural gas.

EEI supports the oil and natural gas production incentive provisions in the Senate and House energy bills and, as previously mentioned, believes Congress can do more to assure low-cost, competitive energy, while protecting the environment.

There are those who advocate end-use restraints on natural gas. These are not appropriate solutions for addressing natural gas supply and demand problems. The market has the ability to manage supply, and over time will return to equilibrium.

The market needs to be allowed to send price signals that will stimulate investment in alternative generating technologies, dual-fuel opportunities, and development of capital intensive new gas supplies. End-use restraints, even if applied prospectively, have the potential to create considerable economic inefficiency and would be counterproductive.

For those concerned about impacts of high natural gas prices on residential gas users directly, and electricity customers indirectly, we urge Congress to fully fund LIHEAP and other consumer related organizations assisting those who have a difficult time paying monthly utility bills.

EEI recommended that the Congress appropriate the full $3.4 billion authorized for LIHEAP funding for FY’04. Weatherization program expenditures can assist those in need by reducing their demand for space heating or cooling.

Conclusion

In conclusion, the use of natural gas to create electricity has been good for consumers and should remain an accessible fuel source for electric generators. There are strong economic, efficiency, and environmental reasons to use natural gas in the generation of electricity.

Even if, as a nation, we transition to greater reliance on other diverse fuel sources and generation technologies, natural gas will continue to be a necessary backstop. It is therefore essential that we take the steps that are necessary to assure an adequate supply.

It is also crucial, however, that Congress and the President provide greater regulatory certainty to the generators of electricity – particularly as to the environmental standards which new and existing generating sources of all types will have to meet – and that the permitting and siting processes be streamlined to reduce the current long-lead times.

Source: Edison Electric Institute, http://www.eei.org/.

For more information from the Senate Committee on Energy and Natural Resources, visit http://energy.senate.gov/.