Musings from the Oil Patch
Comment of the Day

August 16 2012

Commentary by Eoin Treacy

Musings from the Oil Patch

Thanks to a subscriber for this edition of Allen Brooks' ever interest report for PPHB. Here is a section:
According to the Energy Information Administration (EIA), of the 52 gigawatts of new power generation capacity to be constructed between now and 2015, half will be powered by natural gas. That will be ten times the amount of new generating capacity to be powered by coal. Coal has fallen into fourth place behind solar and wind power as a fuel of choice. Importantly, natural gas plants are being helped by low natural gas prices. But the main drivers for increased natural gas-powered generation capacity are their low construction cost and their reduced carbon emissions. According to the EIA's Annual Energy Outlook 2011, the cost per kWh for a coal plant is $2,844 compared to a combined cycle gas plant at $978. Surprisingly, nuclear power is not the most expensive plant to build. A new nuclear power plant is estimated to cost $5,339/kWh, but offshore wind is estimated to cost $5,975/kWh. Offshore wind is just slightly over twice the cost of onshore wind ($2,438/kWh). Solar thermal and photovoltaic are estimated to cost $4,692/kWh and $4,755/kWh, respectively.

The answer to how the average efficiency of gas-fired power plants can be so high is that these plants are favored by their low capital cost, their low energy cost (at least for the present time) and their reduced carbon emissions. Gas-powered plants require less time to construct and they are very flexible in operation. These latter characteristics explain why significant amounts of gas-powered combined cycle generating capacity is being constructed, often as backup for intermittent wind and solar powered plants since gas plants can be switched on and off quickly without sacrificing significant operating efficiency. Until there is a step-change increase in natural gas prices we expect gas-powered plants will remain the preferred choice for generating electricity. That will be good for gas producers and for our climate.

Eoin Treacy's view In an environment where regulation presents an increasingly high barrier to new coal power generation capacity, natural gas is the next most logical choice. The above statistics highlight not only the current allure of low pricing but the additional consideration of natural gas's efficiency in energy production. As a proven technology natural gas offers the least risky alternative to dirtier fossil fuels.

Natural gas rallied impressively from the April lows and returned to test the lower side of the overhead trading range near $3.50. It has pulled back to test the region of the 200-day MA over the last month in an equal sized reaction to that posted in May and June. Medium-term potential for additional upside can continue to be given the benefit of the doubt provided it finds support in the current region.

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