Navigant Research Blog

Will Coal Plant Retirements and Fracking Threaten Electric Reliability?

— December 17, 2014

The implications of the rapid retirement of much of the U.S. coal generation fleet are just coming to light, and transmission operators and generation utilities are actively discussing and planning on contingencies that could cause a real threat to reliability and availability in many regions across the nation.  (The issues around retiring and decommissioning coal plants were discussed in Navigant Research’s research brief, Coal Plant Decommissioning.)  Compounding the threat of coal generation plant retirements is a short-term shortage of coal in many regions of the nation.

The U.S. Environmental Protection Agency (EPA) announced its proposed Clean Power Plan (CPP) rule in June 2014.  It’s expected that the final rule will be announced in June 2015.  The CPP targets CO2 emissions by existing fossil-fueled electric generation and sets targeted reductions for each state.  The plan, as currently proposed, mandates 30% reductions in carbon emissions by 2030 from 2005 levels.

The proposed plan also gives each state flexibility to develop its own approach as to how it will meet the targets, including retiring problematic coal and other fossil fuel generation, adding renewables, such as wind or solar generation, or increasing levels of demand response and energy efficiency programs, which the recent EPA mandates may accelerate.

Time to Plan

Most people do not understand the issues that will arise in the Midwest and the southeastern United States as a result of coal generation plant retirements.  The North American Electric Reliability Corporation (NERC) discusses the implications at length in a recent paper on the impact of generation plant retirements based on the CPP.  NERC concludes the paper by suggesting that states immediately start operational and planning scenario studies, addressing resource adequacy, transmission adequacy, dynamic stability, and  economic and reliability impacts.  This must be done to demonstrate reliability and to ensure that plans of action are technically achievable within the stated time requirements.  “States that largely rely on fossil-fuel resources might need to make significant changes to their power systems to meet the EPA’s target for carbon reductions while maintaining system reliability,” the NERC authors conclude.

Supplies Down

In the near term, another related reliability threat is looming: the availability of coal to fuel the generation plants operating today.  Having formed a new trade group called the Western Coal Traffic League, Midwestern utilities are frustrated because their normal coal supplies from western U.S. coal producers have kept utilities from rebuilding stockpiles burned during last year’s cold winter. Compounding the effect, record harvests, economic growth, and growing oil shipments from the country’s booming oil fracking industry in in the upper Midwest are constraining the rail system.

The effective implementation of the CPP, along with tight supplies of coal, will make for an interesting winter in many parts of the United States.

 

As Demand Soars, Construction of LNG Terminals Booms

— November 24, 2014

International marine construction companies are seeing a bonanza of new projects as countries around the world approve massive new terminals for liquefied natural gas (LNG) – for imports in most cases, and for exports from North America, Australia, and some Southeast Asian countries.  Altogether, this frenzy of port building could amount to hundreds of billions of dollars over the next decade as seaborne trade in LNG climbs to meet spiraling demand, particularly in the energy-hungry countries of China, India, and other Asian nations.

Total deliveries of LNG were flat in 2013 compared to 2012, according to the BG Group, but this masks pent-up demand, as producers in the United States are ramping up export capacity and importing countries are scrambling to build import terminals.  BG Group forecasts that worldwide LNG demand is expected to increase at a rate of 5% annually through 2025, with much higher rates in the developing countries of Asia.

North America

In September, the U.S. Federal Energy Regulatory Commission (FERC) gave final approval to the Cove Point LNG facility, overruling the objections of environmental groups and bringing to four the number of U.S. export terminals officially approved and under construction.  All told, 14 terminals are seeking approval by federal regulators in the United States, on the Gulf Coast, the East Coast, and the Pacific Northwest.  The Northwest facilities, in particular, face fierce opposition from environmentalists opposed to the increased fracking that large quantities of U.S. exports will entail.  With big potential markets waiting not only across the Pacific, but also in Europe, U.S. oil & gas companies and their representatives in Washington, D.C. are eager for more export capacity to come online.  There are also at least a dozen LNG terminals proposed along the coast of British Columbia.

Europe

With unrest in Ukraine giving rise to fears of disruptions of natural gas supplies from Russia, which provides 30% of Europe’s natural gas, European governments and companies are scrambling to build new import facilities.  Paradoxically, with international supplies limited and with Japan, which relies more heavily on imported natural gas for its energy supply than any other country, soaking up much of the available supply at inflated prices, imports to Europe have declined in the last couple of years.  The Gate terminal on the North Sea coast near Rotterdam was built with the support of the Dutch government to maintain the Netherlands’ status as a regional gas hub.  It is now running at 10% of capacity, according to The Economist.

Nevertheless, imports from the United States are sure to increase, and the European Union sees the construction of new import terminals as a critical matter of regional energy security.  Lithuania, for example, is due to open a massive new floating terminal this year or in early 2015.  New terminals are especially important along Europe’s vulnerable southeastern coast, as currently countries in the area are essentially captive customers to Russia’s Gazprom.

Amos Hochstein, the acting U.S. special envoy and coordinator for international energy affairs, testified recently before the Senate Foreign Relations Committee, saying that “[there is a] critical need for Europe to improve its energy infrastructure by constructing new pipelines, upgrading interconnectors to allow bidirectional flow, and building new LNG terminals to diversify fuel sources … We support proposals to build LNG terminals at critical points on European coasts, from Poland to Croatia to the Baltics.”

Asia

The biggest building boom is underway in China, where three import new terminals came online in 2013 and at least two more are expected begin operation before the end of this year.  Already, half of the world’s capacity for regasification (the conversion of LNG to conventional natural gas, for transport by pipeline) is located in Asia.

“China’s imports of liquefied natural gas (LNG) are growing at a record pace,” reported Reuters earlier this year, “as it aims to use cleaner fuels to cut smog in big cities, creating a powerful new source of demand that has the potential to reshape the market for the super-chilled gas.”  China’s LNG imports grew 35% in the first quarter of this year compared to the same period in 2013.

Meanwhile, new production is emerging from Southeast Asia, particularly in Indonesia and Papua New Guinea.  Also, Singapore, which sits at the mouth of the Strait of Malacca, through which passes more than half of the world’s seaborne LNG, has formed ambitious plans to be the LNG trading hub for Southeast and East Asia.

These LNG terminals tend to cost around $10 billion apiece.  It’s a good time to be in the business of building them.

 

Will the Natural Gas Boom Help EVs?

— November 11, 2014

Natural gas is better used to generate electricity to power electric vehicles (EVs) than as a direct transportation fuel, according to a new study by Oak Ridge National Laboratory.  The study, entitled Well-to-Wheel Analysis of Direct and Indirect Use of Natural Gas in Passenger Vehicles, rates EVs powered by electricity from natural gas as being more energy efficient, less polluting, and cheaper to fuel than natural gas vehicles.

A contributing factor in the analysis is that natural gas power plants, especially combined cycle power plants, are very efficient in creating electricity, and when that electricity is used for locomotion by an electric motor, the net efficiency is higher than that of a natural gas engine.  The study assesses losses and energy used throughout the system, including leaks during transportation (from pipelines, etc.) and during compression and decompression of the gas in the case of compressed natural gas vehicles.  In the case of EVs, the study assesses power losses throughout the distribution grid, EV charging, and the power transfer to and from the battery.

As seen in the figure below, the study concludes that even a low-efficiency natural gas power plant would provide a more energy efficient source of electricity than using gasoline in a car.  The study used the Nissan LEAF and the natural gas Honda Civic GX as the baseline for the vehicle fuel efficiency.

Wheel-to-Wheel Energy Use

(Source: Oak Ridge National Laboratory)

Emissions of greenhouse gases, including CO2, are also lower in the case of EVs when either the current mix of generation sources or any type of natural gas power plant are used to create the electricity.  And, as is well known, electricity is also cheaper as a transportation fuel.  Oak Ridge estimated at time of the study that natural gas costs $1.65 per 25 miles for compressed natural gas vehicles, compared to $1.02 for electricity.

Pipeline Peril

It may seem counterintuitive that an extra step in fuel conversion (i.e., gas to electricity) would still be more efficient, but the greater efficiency of stationary gas turbines relative to small engines (as referenced here by Forbes) explains the math.

However, turning natural gas into electricity for EVs requires sufficient pipeline capacity, and a surge of EVs could overwhelm the regional grid if charging occurs at peak times.  Natural gas also has to compete with other forms of generation on price, and there’s no guarantee that the surplus of natural gas from shale would find its way into EVs, as it may simply replace coal.

The study makes the case for facilities that have combined heat and power to add EVs to the fleet instead of adding the significant cost of a natural gas refueling station.  Conversely, a significant argument for natural gas vehicles is their longer driving range and lower upfront cost.  If an EV’s driving range of 80 to 100 miles doesn’t match with the driving requirements, then the economics or efficiencies won’t matter.

 

Going Small, Gas-to-Liquids Finds a Niche

— July 2, 2014

Typically, converting gaseous fuels like natural gas to liquids requires high upfront capital investment and substantial energy inputs to maintain operations and results in significant energy loss.  Despite these challenges, smaller-scale gas-to-liquid (GTL) deals have increased sharply of late.  They include a joint development project involving Waste Management, NRG Energy, Velocys, and Ventech to develop a platform than can convert landfill gas to renewable fuels and chemicals.

To date, GTL projects have been built in only the most extreme cases – where macroeconomic trends are especially favorable or when liquid fuels are unavailable (e.g., Germany during World War II and South Africa under apartheid, both of which relied on coal-to-liquid conversion).

These narrow circumstances explain why just five GTL facilities are in operation globally today, despite GTL technologies being proven commercially.  The most high-profile project, Shell’s Pearl Plant in Qatar, commissioned in 2011, cost a whopping $18 billion to construct, or about $8 per gallon of annual production capacity.  With such a high price tag, the project’s return on investment (ROI) hinges on a free supply of natural gas feedstock and a per-barrel oil price in excess of $40 (brent crude was trading at about $110 per barrel just before ISIS’ recent advance in Iraq).  Meanwhile, Shell recently cancelled another high-profile GTL project slated to be built in Louisiana, citing high estimated capital costs and market uncertainty regarding natural gas and petroleum product prices.  In short, commodity prices matter.

Modular Mode

In light of this limited market uptake, the recent surge of smaller-scale GTL projects is unexpected.  Targeting stranded or associated gas resources, however, these systems are able to skirt many of the macroeconomic barriers to the large-scale GTL projects described above.

Usually wasted or unused, stranded or associated gas presents a number of financial challenges to bring to market using conventional infrastructure.  In other words, the problem lies not in getting the gas out of the ground, but in finding a practical, economical, and efficient way of moving it to market.

In the case of stranded gas – gas fields located near local markets that are usually too small or in places too distant from industrialized markets – smaller-scale GTL processing can convert natural gas into a liquid product that is cheaper to transport.  In associated gas applications, where gas is either flared or injected into oilfields to maximize recovery, smaller-scale GTL can unlock new revenue streams.

Smaller and Safer

In both cases, smaller-scale GTL conversion has significant advantages over conventional infrastructure.  Shrinking the hardware allows greater tailoring of systems to the local resource supply and reduced construction costs.  The modularity of GTL systems allows capital to be allocated in phases, reducing risk to project investors.  And because the modules and reactors are designed only once and then manufactured many times, much of the plant can be standardized and shop-fabricated in skid-mounted modules.

The opportunity for smaller-scale GTL remains significant.  Stranded and associated gas is relatively abundant (estimated at 40%-60% of the world’s proven gas reserves).  One of the more exciting opportunities that has gained attention more recently is the pairing of frontend conversion technologies for processing abundantly available solid biomass and waste into synthetic gas (or syngas) which unlocks many more opportunities globally for smaller GTL platforms.  Navigant Research’s recently published Smart Waste report forecasts that annual revenue from municipal solid waste energy recovery will increase to $6.5 billion worldwide by 2023, due in part to the expansion of emerging technologies like small-scale GTL.

 

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