A key trend of 2012 will be the acceleration from coal to gas in generation.  That's a win for the environment and a win for energy security. Most people don't realise that in 2009 for example, 70% of UK coal was  imported and 70% of that came from Russia. Coal prices soared in 2010 making imports less attractive but still 50% of the total.   

Coal has been around so long that the energy experts who missed shale gas haven't thought about coal either. Coal was always considered to be so prevalent and cheap that it was the first choice for electricity generation worldwide, especially in emerging countries. China and India were considered so desperate to electrify on cost alone that the expert opinion of coal as the fuel to beat was as cast in stone as the idea that natural gas was expensive and insecure.

It's now obvious that despite the condescension of NGO energy experts towards "developing" nations, nations don't simply use one model of development because it worked for others. The emphasis on pollution mitigation in China is a key driver in their five year plan for shale gas development. Similarly, conventional wisdom holds gas as intrinsically insecure compared to coal even in the US.That type of energy expert simply looks back at the charts and sees another price spike one of these years in natgas, so their advice is to stick to coal. So what if always cleaner gas is now actually cheaper in many US markets on a BTU equivalent price? Experts ignore the shale inflection point and base tomorrow's decisions on what happened in the past: Models rule, and the theory of new gas supply paradigms are dangerous, most especially to conventional wisdom reputations.

But with gas actually increasing share of generation, the new paradigm is starting to be considered. The experts seek twenty to fifty year certainty so a few years of shale hasn't been relevant.But that is starting to shift even in the power engineering sector. It's notable that may of the usual risks over operational constraints of gas v coal in power are receding.

 In its "2011 Special Reliability Assessment: A Primer of the Natural Gas and Electric Power Interdependency in the United States," NERC outlined the specific measures needed to mitigate the risk of the bulk power system's increased exposure to natural gas supply and delivery issues. "Strategies - such as storage, firm fuel contracting, alternate pipelines, dual-fuel capability, sufficient pipeline capacity to support normal and emergency operations, access to multiple natural gas basins, or additional transmission lines from other areas - all can help mitigate and manage potential risks to reliability," NERC said.

Natural gas supply is also complex in that  it will still have to back up renewable supply:

Swings in electric demand also present a unique challenge to the partnership. NERC said future gas storage will have to handle traditional fuel supply demands, while also accounting for varying day/night demand swings. Pipeline enhancements are also seen as necessary to support high pressure variable gas loads imposed on a system from gas generation plants. A recent white paper from ICF International echoed this sentiment, asserting that plans must also be made so the pipeline system can account for the variability from intermittent renewable generation.

Fortunately, gas supply should not be a concern. And due to the geographic diversity of shale supplies, grid operators will be able to more easily ensure supply reliability.

"The unprecedented growth in shale production over just the last few years, due to a combination of the prolific nature of the shale plays and the rapid increase in industry drilling activity, is expected to contribute greatly to the future gas portfolio," the study said. "The shales will likely make a significant contribution to the U.S. supply portfolio for an extended period of time - potentially doubling over the next 20 years.

But there is still pushback which creates strange allies.  During the UK Energy and Climate Change Committee investigation into shale gas both the World Coal Council  and the World Wildlife Fund pointed out how unreliable and potentially polluting fracking was. The reality is that the WWF sees renewables as threatened  and the coal industry happy to stoke up fears along with furnaces:

 Natural gas is a more expensive fuel than coal.


  • According to Energy Information Administration (EIA) data, natural gas prices averaged over the period 1999‐2008 have been almost four times more expensive than coal. Natural gas prices have averaged $5.75/million Btu over the ten‐year period, whereas the price of coal has averaged $1.46/MMBtu over the same period.(1)
  • During the first ten months of 2009, the price of natural gas has been more than double the price of coal. Natural gas prices averaged $4.65/MMBtu during January‐October. By comparison, coal averaged $2.23/million Btu over the same period.(2)
  • According to EIA projections, natural gas prices are expected to increase by 60 percent between 2010 and 2030. By comparison, coal prices are projected to decrease by 2 percent over the same period. The table below shows EIA projections (from AEO 2010) for natural gas and coal prices for the electric power sector. Based on these projections, coal is expected to cost a fraction of the price of natural gas for the foreseeable

Natural gas prices are volatile.

  • Over the 19‐year period of 1989‐2008, average annual natural gas prices have fluctuated widely between a low of $2.16/MMBtu in 1991 and a high of $9.66/million Btu in 2005, a difference of $7.50/million Btu. Over the same period, coal prices have varied modestly from a low of $1.20/million Btu in 2000 to a high of $2.52/million Btu in 2008, a difference of only $1.32/million Btu. The graph below shows the volatility of gas prices compared to the stability of coal prices.
That was then, but how do those figures look today?  Gas is still more expensive but the gap is narrowing.  According to the September 2011 report we see  coal at $2.32MMBTU  in the Independent Power Producer sector, which is a slightl increase. The EIA figures for September were $4.37 for gas, but given recent Henry Hub prices of $3.08 MMBTU,  the  true price differential between gas and coal is disappearing.  
Those figures are average of course.  With some stranded gas flared off in the Bakken and Eagle Ford and with constrained gas being sold for the low $2s in the Marcellus sometimes, prices in some locations are going to make coal expensive and dirty: not a good business model going forward.
More on what I see as the key megatrend of 2012 next week when people are back at work and it will actualy get read, but that trend is the growing realisation worldwide that this time it's different.  The inflection point of shale changes everything and one thing that needs to change is to abandon outdated concepts however long they have been around.


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