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Some Fossil Fuel Subsidies in the Electricity Biz

by nb41 Wed Apr 28th, 2010 at 11:48:34 AM EST

We have seen a good example of how a process called Demand  Destruction  works - the use of oil for electricity production in  the U.S. It used to be fairly common to  burn oil and make electricity,  either in a regular boiler (especially  using Bunker Oil, which is  basically only good for boiler  fuel) or a jet engine/combined cycle  system, especially in NY State. But  due to the high price relative to   coal and natural gas... by a factor of almost 10 times the thermal cost   of coal ...well, using oil to make electricity is not a real moneymaker  these days. It just costs  too much to use oil products to make  electricity, given the current  price of oil these days - crude seems to  be centered in on $85/bbl, and  fuel oil is above $2.20/gallon in 100,000  gallon barge lots.  Besides, oil is too valuable for use in  transportation, where coal and  natural gas really can't be currently  used to any significant extent.

That's how Demand Destruction is  supposed to work. If the price gets too  high for some good or service,  customers will either switch to a lower  cost substitute, or else do  without. Unfortunately, demand destruction  can be pretty harsh in many  cases - for example, what if the cost of  food and water gets too high  for some people? -There are no  alternatives to food - just different  kinds of foods - and it's not possible to do without food and water for  long. In the end, most people will pay or do anything to get food and  water - the alternative is to perish, alias be "demand destructed".

In  NY State, there are two other fossil fuels other than oil that are   used to make mass quantities of electricity - coal and natural gas.   Unfortunately, their use, like oil's, causes significant problems that   are completely not covered by the price that is charged for these fuels.   Coal has significantly more external costs than does methane (Ngas) - a   result of messier mining, particulates, acid gasses and heavy metal   particles given off by combustion, as well as more CO2 pollutant per  unit of energy produced by combustion. Extracting  methane can also be  messy, there may be contaminants in the gas, and  there is the  greenhouse gas pollution caused by methane leaks and more  of  that CO2  pollution. Coal is also a lot less expensive than Ngas, and  while coal  prices seem likely to remain constant for some time, Ngas prices are set  to  rise just to get to the point where the marginal price covers the  cost  to extract and the industry/banking sector/investor profit norms -  that  price is near $10/MBtu these days. However, current Ngas bulk prices are   around $4.20/MBtu, and around $5.50/MBtu as delivered to a generation   facility. Meanwhile, coal nationwide is  averaging around $2/MBtu on a  thermal basis.

There are very few new coal burning power plants  in the U.S. - most are  old, and no longer have significant capital  costs - those facilities  have long since been paid off. As a result,  the marginal cost to make  electricity is largely the cost of the coal.  For a facility that is 40%  efficient, at $2/MBtu (~ $48/ton of 12,000  Btu/lb coal), the marginal  electricity production cost would be near  1.47 cents/kw-hr, or  $14.70/MW-hr. Incorporating labor, taxes and  miscellaneous expenses  means that in NY, a price near 2.75 c/kw-hr is  required so that it can  be sold at 3 c/kw-hr. At this price, Ngas is  too expensive to compete  with coal. And, if less coal gets consumed,  prices for coal actually  would drop, just like they would rise if  demand for domestic coal goes  upwards.

The two main external  costs NOT paid for in that prices are airborne  particulates/acid  gases/poisonous heavy metals (especially mercury), and  then CO2  pollution. According to the Physicians for Social  Responsibility in  their report "Coal's   Assault on Human Health", the health cost of coal combustion alone  was ~ $62 billion in   2005, or about $62/ton of coal combusted (about 1  billion tons/year are  consumed in the U.S.). There are also lots of  "premature deaths"  associated with the money cost, but unless those are  rich people, they  just don't seem to count for much - a very bad  situation indeed. It's the "what is the cost of a human life" coupled to  "which human" argument, which has no scientifically valid answer - that  is all about human judgments, philosophy, religion, ethics...

In  2009, the US electricity output from coal averaged 1.884  MW-hr per ton  of coal, and 0.937 billion tons were consumed to make 1785   GW-hr/yr of electricity. This gives the air pollution cost of  electricity form coal of about  $32.91/MW-hr. In 2009 the average price  of coal used for electricity  was   ~$42/ton,   and at ~ $2/MBtu of coal, the fuel cost for a plant operating at 40%   would be about $17/MW-hr. The pollution cost is twice the fuel cost, and   roughly equal to the price charged for generated electricity in WNY in   2009. Cute...

However, now comes the CO2 pollution cost  estimate. For example, in  2007, CO2 pollution from U.S.  coal  combustion was 2.154    gigatonnes (= 2.369 billion tons/yr), and US coal production was 1.28    billion tons/yr; 92.65% of the coal use was done to make   electricity (or 1.18 gigatons of coal used to make that quantity of  electricity). That  makes about 2.19 gigatons of CO2 pollution from the  burning of coal to  make electricity. The amount of electricity made  from coal was 2016    gigawatt-hrs. This makes about 1 ton of CO2 pollution per MW-hr  of  electricity production, nationwide. In NY, the ratio is about 1.28  MW-hr  per ton of CO2 pollution - due to the use of higher heat content  coal.

The "social cost" of CO2 pollution was estimated to be $85/ton   by the Stern  Review  (UK) - this is the downside costs (environmental effects of  climate  alteration by the CO2 pollution from all fossil fuels).  Multiplying  $85/ton of CO2 by 1 ton CO2 pollution per MW-hr gives a  nationwide cost  of about $85/MW-hr for coal derived electricity, or 8.5  cents/kw-hr.

Note: In NY State and some other U.S. Northeastern states, there is a program called the Regional Greenhouse Gas Initiative (RGGI), a sort of "semi-volunteer" system that puts a price on CO2 pollution from fossil fuel combustion. The latest results can be seen at http://www.rggi.org/co2-auctions/results. Unfortunately, CO2 pollutant prices in the RGGI Auction are DECREASING, not increasing - the last price was (Auction 7, 3-10-2010) $2.07/ton to $1.87/ton, down from a high of $3.51/ton (Auction 3, 3-18-2009). And since current prices are less than 1/40 th (~ 2.3%) of the $85/ton "Social Cost", there is essentially no disincentive to additional CO2 pollutant dumping into our atmosphere. The RGGI Auction is acting like a "chump change shakedown", providing some sort of cover to politicians and corporate/state polluters while doing nothing to raise coal and Ngas prices sufficient to cause a change in behavior/less CO2 pollution from electricity production. Oh well...

The sum of particulate matter and CO2 pollution  would be 3.3 c/kw-hr and  8.5 c/kw-hr, or 11.8 c/kw-hr. These external  costs dwarf the marginal  price to produce electricity from coal (about  1.2 to 1.8 c/kw-hr), and  also the average price required to profitably  to produce electricity  from a fully paid off coal production facility.

For Ngas based electricity production, burning 1 MBtu makes about 122.5 lbs of CO2. It turns out for a facility that is 50% efficient, 6.824 MBtu is needed to make 1 MW-hr, also resulting in 0.418 tons of CO2 pollutant. And, at an average price of about $4.20/MBtu (Henry Hub for today) plus $1.30/MBtu for delivery (subtotal = $5.50/MBtu), the cost to make that electricity would be about 5.25 c/kw-hr. Adding in the $85/ton of CO2 Social Cost, (an extra 3.55 c/kw-hr), and a new total electricity price with externals added in would be 8.8 c/kw-hr.

But, the current low price of methane is just a sucker play, as eventually it will have to rise to near $10/MBtu, the current marginal price needed to keep that last billion cubic feet/day in the US supply mix. And that marginal gas supply is being done more and more with "non-conventional gas" like tight shale gas, which is not cheap to do - see  (< Fracking (see also Marcellus   Shale Fracking) - gas from such wells depletes at significantly faster rates.   Hydrofracked Ngas is more difficult to get at and costs a lot more to   produce (it's also a lot messier, and more environmentally damaging),   and prices north of $10/MBtu will be needed to developed this fossil   fuel resource (right now these are "loss leaders" - money losing   initially in the hope that overall Ngas prices will rise to the point   where fracking is quite profitable). By the way, when fracking shale gas   sets prices of $10 to $12/MBtu, all Ngas tends to get priced at this   level - even that which only costs $3/MBtu to produce, and this will   make "conventional" Ngas EXTREMELY PROFITABLE. Companies and individuals   with ownership of "conventional gas" stand to reap incredible profits,   but the question is whether they can hold on long enough to reap such   profits/receive such prices for already discovered Ngas.

Anyway  when delivered Ngas prices rise above $11.30/MBtu, electricity  made  from such Ngas will be more expensive than from Ngas priced at   $5.50/MBtu. At $11.30/MBtu, the required electricity break-even price   would be 9.2 c/kw-hr/ Add in the CO2 pollution cost of 3.55 c/kw-hr and   the new electricity from Ngas cost of production would be 12.75  c/kw-hr.  At such prices, wind turbines are starting to look like a  bargain. And  remember, Ngas prices will keep trending upwards, because  future fields  will be harder to exploit/tap, smaller and deplete faster  than the easy  to find bigger fields found and drained in the past.  Meanwhile, the cost  of production of electricity from wind turbines  will... stay the same.

As for the Marcellus Shale Ngas, nature  has thrown us another ringer...  the shale layer also seems to have a  significant uranium content. And  one of the radioactive decay products  from U238 (as it eventually  converts to stable, non-radioactive lead -  Pb 206) is radium, and that  in turn converts to radon, which is a  chemically inert gas ("noble  gas"). Radon is a nasty one as far as  humans are concerned, because it  can be inhaled into the lungs. the  most common radon radioisotope has a  half-life of about 3.8 days, and  it decomposes into Polonium 218 by  emitting an alpha particle (a very  energetic helium nucleus). This is  like letting loose a cancer causing  shotgun blast in tissue; the alpha  particle gets slowed down by  molecules in the lung rapidly, but in the  process all kinds of ions and  disrupted molecules get made, and this can  (and has been shown to)  lead to lung cancer. So any "hot gas" will have  to be stored somewhere  for a sufficient amount of time (for example, in  76 days, only one part  in 2^20 (or 1 in a million) of those radon atoms  would still be  present. While this may seem trivial, it is not, since  you don't want  to be in a house with a gas stove venting that radon into  a sealed  house in the winter. Even tiny amounts of Rn can be quite  nasty. So add  the storage and "cooldown" of "Marcellus Hot Gas" to the  cost of doing  business, since large scale storage of Ngas is also  expensive.

When  prices for coal and Ngas derived electricity also incorporate the   external costs (and there are more such costs, and also many subsidies   like gas  well depletion allowance and "coal cleaning" - another Federal   subsidy), onshore wind turbines turn out to be lower cost ways to make   electricity in most of NY State, and much of the U.S. If just the   particulate matter and CO2 pollution costs for coal, and the CO2   pollution/proper waste disposal of hydrofracking wastes for Ngas were   incorporated into the price of these fuels, the relentless process of   Demand Destruction would take place, and these two polluting forms of   electricity production would fade away. But, since these external costs   are NOT incorporated in the price of these fuels - and legions of   lobbyists are highly paid to make sure those externals remain external   to the price of coal and Ngas usage - well, these are looked upon as   economical ways to power up our country and world with electricity. A   variation on the REAL Golden Rule - them that has the gold gets the best   shot at making more gold - and not the "Do-Gooders Golden Rule" of "do   unto others as you would unto yourself".

This Real vs.  Do-Gooders Golden Rule conflict is central to the current  global  warming argument (and that also applies to energy security, peak  oil,  peak Ngas, etc). And don't think for even a nanosecond that the  likes  of Exxon-Mobil, Massey Energy or Koch Petroleum will let their  gaze  stray from the externalities issue. Their aim is to keep those  external  costs external from the price of their moneymaking fossil  fuels. And  it looks like they are doing a fine job on that one.

cross-posted from http://www.wagengineering.blogspot.com


Why use so many different units?  comparing barrels to Mbtu is just silly when you could be talking about GJ.
by njh on Wed Apr 28th, 2010 at 07:03:40 PM EST
(Not to mention mixing tonnes and tons)

It's a good article otherwise, thanks.  I was surprised that the externalities of coal were 2* the price!

by njh on Wed Apr 28th, 2010 at 07:09:56 PM EST
[ Parent ]

For coal, it's almost 4 times the price, and I'm sure that is conservative. As for units, 1000 kg = 1 tonne, 2000 lbs - 1 ton, and at least we don't weigh in units of stones (114 lbs) or measure time in fortnights, or use velocity units of furlongs per fortnight any more.


by nb41 on Wed Apr 28th, 2010 at 11:14:37 PM EST
[ Parent ]
Actually, I quite like fortnights, human scale time is inherently non-metric, and a fortnight is a useful length of time.

you can keep the furlongs, knots, flozs etc.

(of course, having lived in the US I actually speak american imperialism fluently :)

by njh on Thu Apr 29th, 2010 at 02:25:38 AM EST
[ Parent ]

I'm capable of using any of them. But, in my neck of the woods, natural gas is priced in $/MBtu, and gasoline is $/gallon, coal in $/ton and crude oil in $/bbl (42 gallons). But, you will be happy to know, electricity is all metric, all the time.


by nb41 on Wed Apr 28th, 2010 at 11:11:09 PM EST
[ Parent ]
I don't know that "subsidy" is here a useful metaphor of the externalized costs of fossil fuel exploration, extraction, combustion. You mention adverse health effects but don't really elaborate on price of CO2 volume. Environmental toxicity in arable land and human bodies attributable to these activities is the loss center closest to present tensions. Morbidity could be the ring that binds people to demand destruction --or "climate change" action-- except I can't recall one expert in this country, the US, willing to connect pathogenic defects to particulate and heavy metals pollution.

You may well ask yourself, Who is my reader? The dollar amounts would be meaningful to Ratepayer, if they were associated with particular mining and NG companies as well as utilities. The dollar amounts are not meaninful to Investor, as by definition they aren't attributed to operations. One means to bridging the gap between winners and losers is selecting trade data to answer the question, How does fuel cost encourage or discourage vertical integration and combinations that predicate price fixing per kWh? Look at National Grid, for example: It's subsidiary NG distribution and transmission businesses are pertinent factors in the state's evaluation of Deepwater's offshore wind farm equity offer and expected rate of return.  

I admit, separating operating expenses from state and federal taxes --the top line "subsidies" which vary by utility service area -- is a tall order; but someone's got do it before advancing any generalizable valuation of externalities. I might be impressed, if the money my electric company "saves" by burning x tonnes or x cu.ft appeared in my monthly statement of customer profitablity.  

Speaking of Rhode Island and RGGI, what can you tell us about CCX --a pure play exchange-- its carbon credit trading history and certification protocols? Its US domestic and international membership is quite diverse, in terms of their marketable assets.

Diversity is the key to economic and political evolution.

by Cat on Thu Apr 29th, 2010 at 08:28:05 AM EST
One more tip on carbon market failure: See Nextra portfolio of fossil and renewables fuels. (National Grid had acquired Seabrook with New England Electric System and Eastern Utilities Associates in 2000.) Deregulation permits one subsidiary to "hedge" another.

Diversity is the key to economic and political evolution.
by Cat on Thu Apr 29th, 2010 at 08:50:40 AM EST
[ Parent ]

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