NATURAL GAS:

Wild cards lurk in the speedy switch to gas-fired power generation

The rush to natural gas-fired power generation may be just getting started, and industry leaders and policymakers aren't doing enough yet to prepare for a possible natural gas-dominated future, the research chief of the Electric Power Research Institute says.

"Changes are happening in the industry at a pace that is unprecedented," said Arshad Mansoor, senior vice president heading the research and development portfolio at EPRI, the U.S. power industry's leading research establishment.

In 2007, coal plants produced nearly half of U.S. electrical energy, while gas accounted for 22 percent. Low gas prices from the shale boom lifted the natural gas share to 30 percent last year, while coal's share dropped to 38 percent, according to the Energy Information Administration.

"Anybody who thought that this big a system would turn the resource mix like that in, I would say, a heartbeat -- [that] would have been unthinkable," Mansoor said in an interview.

But the switch to gas plants from coal may accelerate further with gas accounting for possibly 60 percent of U.S. electricity outlook before the end of the decade, he added. "Hopefully, we don't wake up one fine morning and find that [has happened] without having taken the steps we need to take" to assure the grid's reliability and stability, he said.

EIA is not predicting anything like a complete eclipse of coal in the power sector. It currently projects coal plants will supply 35 percent of U.S. power in 2040, with natural gas holding steady at 30 percent. Renewable power actually grows at a slightly faster clip than gas over that time, the EIA advance 2013 Annual Energy Outlook forecasts.

But Mansoor says there are many wild cards in the game alongside the shale gas windfall. One is the surge in demand-response programs, in which vendors commit in advance to shut down power temporarily at clients' locations in return for payments, relieving load demand on peak power days. In organized power markets in the mid-Atlantic, New England and New York, he said, "demand response is almost becoming the next resource." The volume of market-based demand-response bids is also unprecedented, he said.

"I'm not saying it's good or bad," Mansoor said. But the combined growth of variable renewable power and demand-response bids is jarring the status quo. "The system has been built for the last 100 and some years on the premise that you dispatch generation to meet forecasted load. It's a very simple operating principle."

It's becoming a far more complex equation. "There are many effects. What happens if the demand response is not there on the third day of a 105 degree heat wave? And then, what is the incentive for keeping capacity connected to meet the peak load as we increase variable generation?" Mansoor said.

"All variable generation -- solar or wind -- they provide energy. You bank on them to give energy when they have it. But somebody needs to be there to meet the forecasted peak load in the worst-case scenario. That's installed capacity. If we have demand response coming in, renewables coming in, why would you keep your [coal] plant operating if it's only needed four times a year?"

Another wild card: "We are also seeing very early stages of self-generation in small industrial and even small commercial with combined heat and power," Mansoor said. A power developer may offer to build a small gas-fired unit to serve a big box store, supplying electricity and hot water for, say, 9 cents a kilowatt-hour for 20 years, he said.

"You still have the utility connection, but in essence you are self-generating," he said. If that trend takes hold -- and the outlook for years of relatively cheap gas makes that more likely -- then the challenges only grow for ensuring enough gas supply through the pipeline network to keep the power generators running.

Regulatory structures don't yet exist to ensure the reliable operation of a heavily gas-dependent grid, he added. In 1965, the New York blackout stunned the power industry, revealing the unanticipated vulnerability of the power grid's growing interconnections and the need for much closer coordination. The industry and policymakers need to head off a similar surprise due to the gas boom, he said.

But decisive action isn't easy for a power industry facing a future of stagnant revenue growth on one hand, and rising pressures to spend money on new environmental regulations, cyber threats and digital technologies, many industry leaders and analysts say.

"We can't see what the system ought to look like in 2020-plus," said one industry leader. "Some [industry] people feel there is so little room to act, all they can do is play for time."

'We want to have our cake and eat it, too'

In the face of these dilemmas, Mansoor said, EPRI seeks technical solutions that increase flexibility and resiliency in power supply and grid operational controls.

"The example is a 350-megawatt coal plant," he said. "It's on the margin. You're not sure whether you want to run it. Do you want to retire it? Do you want to re-power it? Do you want to put in a new combined cycle gas plant in there?"

One option is to retrofit the plant to burn gas as well as coal. "You can take a boiler, modify [it] and have the capability to do gas-firing. You now have converted a coal plant to a dual-firing capacity gas plant." But that takes money that shareholders or regulators may not want to spend. "Why would you do dual firing when for $800 million, you can build a 1,000-megawatt combined cycle plant" in two or three years, Mansoor asked.

EPRI is researching strategies for reducing the efficiency penalty of such a conversion, seeking to make this dual-fuel option more affordable, he said.

"But there is an extra cost to do that option. Why would you pay that? Because you don't want to wake up in 2019 and find that gas has become crude oil" -- a globally traded hydrocarbon vulnerable to geopolitical price shocks, he said. Gas prices in the United States, Europe and Asia are disconnected today because of the tiny impact of liquefied natural gas maritime shipments. Will that still be so in 2020, he asked?

Mansoor said it is hard for electricity markets, tuned to short-term pressures, to take the necessary long-term actions. "Particularly in the U.S., we all believe at the end of the day command and control does not work: Provide the right incentive, provide the right framework, and people will respond. I think it takes a mixture" of markets and policy, he said.

"You've got to come up with a requirement that is going to be at a higher level," he said, policies that are going to be good for society long-term.

"We want to keep electricity reliable, affordable and clean, all three, and not one of them at the expense of the other. ... It's almost, we want to have our cake and eat it, too. Because we are technologists, we believe it is possible," he said.