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The Nature Of Natural Gas

At first glance, adding more natural gas power plants to the nation’s electrical grid sounds like a simple and quick energy shift.

Using the latest high-tech natural gas power plants instead of old-fashioned coal plants could help reduce overall emissions from the utility sector. Building new natural gas power plants is supposed to be faster and cheaper than building more coal plants. Natural gas supplies should be plentiful when a new production technology, hydraulic fracturing (“fracking”), moves into high gear.

Thirty-second sound bites on TV make it sound so easy.

But is it?

Electric utilities don’t run their businesses based on advertising slogans. Electric utilities need facts when making decisions. Today they’re asking tough questions about the expected benefits and true costs of using more natural gas instead of coal.

Will increasing the use of natural gas be a bargain—or a budget buster?

Competition for gas can push up prices
Coal and natural gas are both fossil fuels. But demand for these two fuels is very different.

The materials in coal deposits vary from one location to another. Certain kinds of coal work best for manufacturing, while other kinds are best for generating electricity. Each industry knows which kind to buy—and there isn’t much competition among them to buy the other kinds of coal.

Natural gas is more of a “one size fits all” fuel. No matter where natural gas comes from, its main ingredient—methane—can be used for many different purposes.

Natural gas is already a major fuel within the electric utility sector, generating about 23 percent of the nation’s electricity each year.

In the United States, three other major sectors also use natural gas. Demand for natural gas is huge—more than 20 trillion cubic feet during 2010. Recently the U.S. Energy Information Administration reported each group’s natural gas use:

• Electric power sector—7.4 trillion cubic feet
• Industrial sector—6.6 trillion cubic feet
• Residential sector—5 trillion cubic feet
• Commercial sector—3.2 trillion cubic feet

Each sector competes with all the others to buy the same kind of natural gas. With four different groups using the same resource, prices go up and down as demand for natural gas changes among each group. Pressure in the form of increased demand from one sector can change the price for everybody else.

During harsh winters, natural gas demand gets a double push upward. The first push results from the increased demand from the residential sector—more than half of U.S. homes rely on natural gas for heating. The second reason for higher winter demand comes from electric utilities using natural gas to generate electricity for houses that use electricity to heat their homes.

Hot, humid summers also affect the price of natural gas. In many parts of the United States, electric utilities need extra natural gas to operate power plants to meet peak summer demand for air conditioning. That can send natural gas prices higher again.

The cost of natural gas is low right now. The same quantity of natural gas that cost $4 in 2011 cost more than twice as much ($8) just a few years ago. But utilities are concerned that prices may rise again.

More storage capacity, pipelines will be needed
Two major additional construction projects will be needed to support new natural gas power plants.

A study commissioned by the Interstate Natural Gas Association of America (INGAA) predicts that if electric utilities substantially increase their use of natural gas, the United States and Canada will need 400 to 600 billion cubic feet of additional natural gas storage space. These short- and long-term storage areas are needed to maintain the steady flow of natural gas as demand changes on a daily and seasonal basis.

Handling larger amounts of natural gas will also require improvements to the existing pipeline system. The study says that tens of thousands of miles of additional pipelines will be needed to bring natural gas from the production fields to processing centers, storage areas, and power plants.

But there’s another problem.

While a new gas-based power plant can be ready to generate electricity within two and a half to three years, adding enough storage capacity and building new pipelines might take up to six years. That’s a big gap.

John Holt, senior manager for generation and fuels at the National Rural Electric Cooperative Association, says, “The number one issue is the price of the gas.” The billions of dollars needed to develop storage areas and build new pipelines will be added to the cost of the natural gas over the years it takes to build them.

Holt says, “Our (electric co-op) members tell us that getting a long-term contract from natural gas suppliers can be difficult. In a 5- or 10-year contract, there may be a set price for the entire contract, or it may have an escalation clause in it.”

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