Clean Power Plan could produce over $2 billion/year increase in natural gas sales for Texas shale companies
This will come as a shock to Texas Gov. Greg Abbott and other high profile critics, but the EPA’s Clean Power Plan actually represents both threats and opportunities.
You can read some of what the critics have to say and the background to the Clean Power Plan in Texas in my previous column. Opportunities, however, often receive short shrift in the public debate, which I’ll try in my limited way to redress.
Let’s start with the threats.
A consistent message from the experts I interviewed for this column is that the Texas electrical generation and distribution system works pretty darn well and it’s very important the Clean Power Plan not screw up what took over a decade to perfect. About 85 per cent of the electricity market was deregulated in 2002.
According to the US Energy Information Administration, Texans paid an average retail price of $.0855/kwh in 2013, about middle of the pack compared to other states, but certainly much less than other big states like California at $.13/kwh and New York at $.152/kwh.
Let’s start with the threats to the system.
Tracy Hester, professor of law at the University of Houston who specializes in the application of environmental laws to emerging technologies, says the biggest risk is simply getting it wrong. Power generation and distribution systems are huge investments that take a tremendous amount of engineering go get right.
“If you’re going to be making investments in the grid and power sources that rely on really deep conceptual models that are in flux, you have a huge risk,” he said in an interview.
“Making bad investments, and potentially creating reliability issues, that is something people need to think hard about before they step.”
An example of that type of risk, says energy economist Ed Ireland, is the potential to disrupt the efficient functioning of the electricity market. Ireland points to the clean energy incentive programs as a potential problem.
Renewable energy generation is prone to severe fluctuations because the wind doesn’t always blow and the sun doesn’t always shine. Texas already generates 13 per cent of its power from renewables, mostly wind, and Ireland worries that if renewables are increased faster than the power grid can be adapted to handle them, electricity prices will go up.
“The credits for renewable sources kicks in 2020 and 2021, which means you have to move right now to start building wind and solar plants,” he said in an interview.
“What if the credits cause too much renewable generation to be built in certain parts of the state with not enough natural gas generation available for peaking? Then load balancing capability is not available.”
Ireland points out that brown outs would wreak havoc on crude oil refineries in Texas, which in 2013 had a capacity of over 5.1 million barrels of crude oil per day and accounted for 29 per cent of total US refining capacity, according to the EIA.
Another threat is the recent proliferation of EPA rules that affect power generation. John Fainter, CEO of the Association of Electric Companies of Texas, says that in addition to the Clean Power Plan, his members are also coping with regulations on ozone, regional haze, cross-state pollution, and other rules the EPA administers in “silos” that don’t talk to one another.
“So you have to do things one by one and make serious investment decisions and regulator compliance decisions on each one,” he said in an interview. “To be efficient, all those things must be considered, but in the grand scheme the timelines are quite tight and technology is changing rapidly.”
Fainter points out that most Texas utilities understand that renewable energy technology is maturing quickly and they have to adapt to the changing times.
“This is a tremendous technological advantage for the industry and I don’t care whether its the telephone or automobiles, when you start developing technology, you can’t stop it,” he said. “People in our industry will have to be mindful that as this technology [renewables] develops, and they’ll have to be able to deploy that technology and have the resources to do that.”
A recent EIA study examined a number of scenarios around the national implementation of the Clean Power Plan and concluded that over the next 15 years natural gas will displace coal, supported by a much smaller amount of wind and solar. After 2030, assuming renewables technology is more mature and economic, wind and solar account for a larger share of new electricity generation.
Fester, Ireland, and Fainter all agree this is the scenario that can be expected to play out in Texas. Natural gas is already the leading fuel for Texas power generation at 17,500 GWh in April (56% of total generating capacity), compared to coal at 7,500 (24%), renewables at 4,000 (13%), and nuclear at 2,500 (8%).
Texas is far and away the biggest producer of natural gas, accounting for over 25 per cent of American production.
At a time when low oil prices are rocking Texas shale companies, more demand for natural gas should be welcome, according to Ireland.
“There is a great potential to not only replace coal-fired plants, but also replace old natural gas-fired plants with gas-fired new combined cycle plants” that are more compatible with the generation fluctuations of wind and solar, said Ireland.
“There is huge market potential out there.”
How huge? Well, here’s my back of the cocktail napkin calculation.
Texas consumes about 4,100 trillion Btus of natural gas and 1,500 trillion Btus of coal annually, according to the EIA. If coal consumption dropped by half and that 750 trillion Btus was added to the natural gas usage, consumption would rise by about 18 per cent. That’s approximately 730,000,000,000 cubic feet of gas, which at a price of $3.75/Mcf is valued at $2,738,558,909.
In 2013, Texas consumed 102.5 million short tons of coal to generate electricity, but only produced 42.9 million short tons. It’s difficult to say whether Texas utilities would stop using out-of-state coal first. If they did, and Texas coal production stayed the same, the state economy would receive the full benefit of additional gas production and sales.
Add on to that the revenue and jobs created by additional wind and solar generation, which is beyond my statistical skills.
Nevertheless, the economic benefit is not pocket change.
The critics have plenty of legitimate concerns about the Clean Power Plan. But as the public debate heats up in coming months, let’s not forget to figure in the potential benefits, too. Especially for hard hit shale producers who could use another market for their product.