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Shifting natural gas prices are making it a challenge for states to place their bets on the most cost-effective and least risky ways to comply with impending carbon regulations.
Those prices could likely determine whether it makes sense to replace retiring coal generation with natural gas or renewable energy.
To help with that decision process, experts at the University of Michigan and a Lansing-based energy consulting firm have released a model to make that planning easier and more accessible to stakeholders beyond just utilities.
Specifically, the model considers the risks that would apply to ratepayers as states develop new combinations of energy sources and efficiency into their portfolios to meet requirements of the Environmental Protection Agency’s Clean Power Plan.
According to the study’s lead author, the model “changes a lot of the traditional arguments” about the costs utilities and ratepayers face for achieving compliance.
On the generation side, states will be weighing the costs of natural gas versus renewables as coal-fired generation is retired to meet the emission targets.
“That choice depends on what you expect future prices to be,” said Douglas Jester, a principal at Lansing-based 5 Lakes Energy and author of the report, “Michigan and the Clean Power Plan: Clarifying the Compliance Options.”
“But there’s a risk attached to that and you are placing a bet on what those future prices will be,” he added. “What we need to do now is not just develop a plan based on one price forecast but also seriously look at the risks.
“If you make a bet on natural gas and then the price of that goes up fairly rapidly, it takes time to develop the alternative. How much are you losing and how costly is it in the meantime? On the other side, if you go the renewables route, you’ve committed money to those and if gas turns out to be cheaper, how much are you losing in the meantime?”
Jester, along with Dr. Jeremiah Johnson at the University of Michigan’s Energy Institute, started developing the model — called the State-based Carbon Rule Analysis for Power Systems, or SCRAPS — in early 2014. A second model — the State Tool for Electricity Emissions Reduction, or STEER — will build upon SCRAPS findings and add more generation and policy options, though it “won’t change the fundamental conclusion,” Jester said.
When natural gas is cheap
The researchers’ model shows that under the current scenario of low natural gas prices, states could actually retire more coal with natural gas generation compared to doing so with renewables.
“Complying with the Clean Power Plan by replacing coal generation with natural gas leads to the retirement of far more coal generation than does replacing coal generation with renewable generation,” the report says. “This also means that in the near term, choosing the natural gas path reduces criteria pollutants and airborne toxics more than the renewables path.
“We can no longer just compare direct cost of energy from renewables to direct cost of energy from natural gas, nor are the pollution implications of these choices straightforward. We need to approach this choice with a more sophisticated approach to uncertainty and risk than has been past practice.”
For example, replacing coal retirements with natural gas reduces Michigan’s coal consumption by 55 percent by 2030, the report says. Natural gas consumption increases more than 200 percent above 2014 levels. Nitrous oxide emissions fall by 43 percent, sulfur dioxide by 53 percent and mercury by 54 percent.
The low-cost gas scenario — at $3.83 per MMBtu — reduces Michigan’s total electricity bill by $609 million, the report says.
On the other hand, “If we choose the natural gas path and natural gas prices rise, we may regret that we are stuck using expensive natural gas when we could have had free wind or solar ‘fuel,’” the report adds.
In that scenario, natural gas is $6.73 per MMBtu. Coal replacement is made up mostly by renewable energy and efficiency with no new gas plants, equivalent to a 27 percent renewable energy portfolio. The total electricity bill falls by $378 million, while coal consumption drops by 30 percent. Reductions in criteria pollutants are also less compared to those in the natural gas model.
A $4.90/MMBtu gas price appears to “tip the balance” between which plan to take, the report says.
“A lot of our traditional discussions look a bit different in this context,” Jester said.
Ultimately, the report says, continuing investments in energy efficiency will reduce demand and the need for new power plants.
With efficiency programs in place and if renewables are cheaper than natural gas, Michigan could get 19 percent of its energy from renewables and 11 percent from natural gas, Snyder announced. If natural gas is cheaper, those figures change to 9 percent and 20 percent, respectively.
“When utilities propose big-dollar investments, we need to make sure those investments will keep down costs, provide reliability, and protect the environment,” according to Snyder’s “calls to action.”
Sam Gomberg, Midwest energy analyst for the Union of Concerned Scientists, told an audience in Grand Rapids Thursday that while Snyder’s plan recognizes renewables and efficiency, “What he didn’t lay out was a lot of policy specifics to get there.”
In an interview, Gomberg called Jester’s model “very robust” that is “really detailed on what states can do. We think that model is good for looking at state-level compliance.”
He added that the model suggests relying on renewables to replace coal will be more cost effective given the likelihood of gas prices increasing.
Moreover, while natural gas has benefits over coal, the Union of Concerned Scientists warns in a recent report about a “wholesale shift” from coal to natural gas, resulting in higher prices as more utilities rely on it.
Essentially, states’ compliance decisions affect each other.
“Despite the shale gas surge, upward pressure on prices is likely to result from increases in demand for natural gas for electricity and other competing uses — including home heating, industrial production, and transportation — uncertainties about supply, and potentially increased exportation of U.S. natural gas,” the UCS report says.
The 5 Lakes report puts it this way: “It is very likely that if many states pursue the natural gas path for compliance, natural gas prices will rise even faster than (those projected by the Energy Information Administration’s estimates). On the other hand, if most states pursue the renewables path, natural gas consumption may be less than (EIA estimates) and natural gas prices will not rise as fast as forecast.”
Taking it to other states
While the model is geared toward Michigan policymakers who are developing a new comprehensive energy plan while complying with EPA rules, Jester said he has contracts in Arkansas, Virginia, Pennsylvania and Illinois to apply the model using data from those states.
Jester said the model will be shared with any stakeholders who ask, free of charge. He said utilities have their own “conceptually similar” models for planning, though those are “expensive, they use proprietary data and they are fairly difficult to use.”
“The idea is to make the utility planning logic more accessible to all stakeholders for planning compliance with the Clean Power Plan,” he said. “With this report, I was hoping that Michigan policymakers would think about the future of natural gas and renewables from the mindset of considering the options and risks that follow if you go down either path.”
Gomberg said he hopes risk considerations are taken into account more during the energy debate.
“There is a lot of talk about costs, I don’t feel there is enough talk about risk,” he said. “You’re looking at 20- to 60-year investments — if you don’t do it right, you’re stuck with it. There is value to risk mitigation, you have to find the right balance to prepare for the future.”
And those risks fall on ratepayers, not utilities, he said.
“Natural gas has a lot of price variability, price spikes occur once in a while,” Gomberg said. “Those are pushed directly onto ratepayers.”