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