Renewable Energy - Lawrence Berkeley National Laboratory
Renewable Energy: Vanquisher or Hapless Victim of High Natural Gas Prices? Mark Bolinger ([email protected]) Lawrence Berkeley National Laboratory http://eetd.lbl.gov/ea/EMS/ NARUC 2004 Winter Committee Meetings Committee on Energy Resources and the Environment March 9, 2004 Environmental Energy Technologies Division • Energy Analysis Department
Topics 1) Uncertainty over future natural gas prices 2) The value of long-term fixed-price contracts for renewable energy 3) What impact do renewables have on gas prices? 4) What impact do high gas prices have on renewables? Environmental Energy Technologies Division • Energy Analysis Department
Natural Gas Prices Are High and Volatile 10
10
9
9 8 7
Source: NYMEX
Environmental Energy Technologies Division • Energy Analysis Department
Mar-10
Mar-09
Mar-08
Mar-07
Apr-06
Apr-05
Apr-04
0
Apr-03
0
Apr-02
1
Apr-01
1
Apr-00
2
Apr-99
2
Apr-98
3
Apr-97
3
Apr-96
4
Apr-95
4
Apr-94
5
Apr-93
5
Apr-92
6
Apr-91
6
$/MMBtu (nominal)
NYMEX natural gas futures strip on 03/04/04
Daily price history of 1st-nearby NYMEX natural gas futures contract
7
Apr-90
$/MMBtu (nominal)
8
NPC Gas Price Forecast (Henry Hub)
Environmental Energy Technologies Division • Energy Analysis Department
EIA, NYMEX Imply “Balanced Future”
7 6
REACTIVE PATH AEO 2004
5 NYMEX 4
BALANCED FUTURE
Environmental Energy Technologies Division • Energy Analysis Department
2025
2023
2021
2019
2017
2015
2013
2011
2009
2007
2005
3
2003
$/MMBtu ($2002 at Henry Hub)
8
…But Be Wary of Price Forecasts… Historical AEO Wellhead Gas Price Forecasts vs. Actual Wellhead Price
8
90
86
7
92 04
6
85
89
5 4
93 94 95
03 02 0100 99 98
87
3
97
2
96
Source: EIA
Environmental Energy Technologies Division • Energy Analysis Department
2015
2013
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1987
1985
1
1991
Actual Wellhead Price
1989
Wellhead Price (Nominal $/MCF)
91
Topics 1) Uncertainty over future natural gas prices 2) The value of long-term fixed-price contracts for renewable energy 3) What impact do renewables have on gas prices? 4) What impact do high gas prices have on renewables?
Environmental Energy Technologies Division • Energy Analysis Department
LBNL’s Accounting for Fuel Price Risk… Question: How to compare the levelized cost of fixedprice renewable to variable-price gas-fired generation? to
Current Practice:
• Cost of renewables is often compared to cost of gas-fired generation based on uncertain fuel price forecasts
Best Practice:
to
• Cost of renewables should be compared to cost of gasfired generation based on a guaranteed fuel price
How do guaranteed forward gas prices compare to uncertain gas price forecasts?? Environmental Energy Technologies Division • Energy Analysis Department
Forward Prices Exceed Price Forecasts November 2000
4.1
Natural Gas Price ($/MMBtu)
Natural Gas Price ($/MMBtu)
3.9 3.7
Implied Forward Swap Curve (Enron)
3.5
EIA Forecast (AEO 2001)
3.3 3.1 2.9 2.7 2001
2002
2003
2004
2005
2006
2007
2008
2009
4.2 3.7 3.2
Implied Forward Swap Curve (Enron)
2.7 2.2 2002
2010
Source: Enron and EIA
EIA Forecast (AEO 2002)
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: Enron and EIA
November 2002
3.8 3.6
NYMEX Futures Price (Annual Average) EIA Forecast (AEO 2003)
3.4 3.2 3.0 2003
2004
Source: NYMEX and EIA
2005
2006
October 2003
5.2
Natural Gas Price ($/MMBtu)
4.0
Natural Gas Price ($/MMBtu)
November 2001
4.7
2007
2008
5.0
NYMEX Futures Price (Annual Average)
4.8
EIA Forecast (AEO 2004)
4.6 4.4 4.2 4.0 3.8 2004
2005
2006
2007
Source: NYMEX and EIA
Environmental Energy Technologies Division • Energy Analysis Department
2008
2009
Levelized Premiums Average $0.7/MMBtu 1.0
0.7 0.6
0.8 0.7
0.5
0.6
0.4
0.5 0.4 0.3 0.2 0.1 0.0
0.3
Enron - AEO 2001 (November 2000) Enron - AEO 2002 (November 2001) NYMEX Futures - AEO 2003 (November 2002) Williams Physical Supply - AEO 2003 (November 2002) NYMEX Futures - AEO 2004 (October 2003) Average
2-Year
5-Year
6-Year
7-Year
0.2 0.1 0.0 10-Year
Contract Term Environmental Energy Technologies Division • Energy Analysis Department
Implicit Premium (¢/kWh)
Implicit Premium ($/MMBtu)
0.9
Implications Whether these premiums represent “hedge value” or something else (e.g., biased forecasts) is debatable, but does not change the fundamental implication of this work: Use forward prices, not price forecasts, when comparing the levelized costs of gas-fired and renewable generation For more information: http://eetd.lbl.gov/ea/EMS/reports/53587.pdf Environmental Energy Technologies Division • Energy Analysis Department
Topics 1) Uncertainty over future natural gas prices 2) The value of long-term fixed-price contracts for renewable energy 3) What impact do renewables have on gas prices? 4) What impact do high gas prices have on renewables?
Environmental Energy Technologies Division • Energy Analysis Department
Renewables Displace Natural Gas Theory: As renewables displace gas-fired generation, demand for natural gas declines, and the price of gas falls Date of Author Study EIA 1998 EIA 2000 EIA 2001 EIA 2001 EIA 2002 EIA 2002 EIA 2003 UCS 2001 UCS 2002 ACEEE 2003 NPC 2003
Model National RPS Used Modeled NEMS 10% by 2010 NEMS 7.5% by 2010 NEMS 10% by 2020 NEMS 20% by 2020 NEMS 10% by 2020 NEMS 20% by 2020 NEMS 10% by 2020 NEMS 20% by 2020, EE NEMS 10% by 2020 EEA 6.3% by 2008, EE EEA -
Reduction in US Gas Consumption
Gas Wellhead Price Reduction
Quads (%) in 2020
$/MMBtu (%) in 2020
1.1 (3.4%) 0.4 (1.3%) 1.5 (4.0%) 3.9 (10.8%) 0.7 (2.1%) 1.3 (3.8%) 0.5 (1.4%) 10.5 (29.7%) 0.7 (2.1%) 1.4 (5.4%) -
0.34 (12.9%) 0.19 (6.6%) 0.27 (8.4%) 0.56 (17.4%) 0.12 (3.7%) 0.22 (6.7%) 0.00 (+0.05%) 1.58 (50.8%) 0.05 (1.5%) 0.74 (22.1%) -
Average Implicit Inverse Supply Elasticity 3.6 3.2 2.2 1.5 1.3 1.3 0.1 1.7 0.9 11.5 ~4
Average inverse elasticities mostly range from ~1 to ~3: for each 1% drop in demand, gas prices fall 1%-3% Environmental Energy Technologies Division • Energy Analysis Department
Simplified Method – Inputs “Model” results, without having to run the model!! •
Gas Displacement (1 MWh RE = 0.6 MWh Gas-fired)
•
Heat Rate of Displaced Gas-Fired (7,500 Btu/kWh)
•
US Gas Consumption Forecast (from AEO)
•
Inverse Elasticity of Supply (range from +1 to +3)
•
US Gas Wellhead Price Forecast (from AEO)
•
Wellhead to Delivered Prices (1:1) Environmental Energy Technologies Division • Energy Analysis Department
Simplified Method – Results
Change in Gas Price, All Sectors (2002 $/MMBtu)
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
Aggregate Impact of Current State RPS on Gas Prices
0.00
US Savings in 2025 (2002$) : $1.6 Billion ($20/MWh)
-0.02 -0.04 -0.06
$3.3 Billion ($39/MWh)
-0.08 -0.10 -0.12 -0.14 -0.16
Inverse Supply Elasticity = 1.0 Inverse Supply Elasticity = 2.0 Inverse Supply Elasticity = 3.0
$4.9 Billion ($59/MWh)
Environmental Energy Technologies Division • Energy Analysis Department
Topics 1) Uncertainty over future natural gas prices 2) The value of long-term fixed-price contracts for renewable energy 3) What impact do renewables have on gas prices? 4) What impact do high gas prices have on renewables?
Environmental Energy Technologies Division • Energy Analysis Department
With Gas Prices this High… 10
10
9
9 8 7
Source: NYMEX
Environmental Energy Technologies Division • Energy Analysis Department
Mar-10
Mar-09
Mar-08
Mar-07
Apr-06
Apr-05
Apr-04
0
Apr-03
0
Apr-02
1
Apr-01
1
Apr-00
2
Apr-99
2
Apr-98
3
Apr-97
3
Apr-96
4
Apr-95
4
Apr-94
5
Apr-93
5
Apr-92
6
Apr-91
6
$/MMBtu (nominal)
NYMEX natural gas futures strip on 03/04/04
Daily price history of 1st-nearby NYMEX natural gas futures contract
7
Apr-90
$/MMBtu (nominal)
8
…Renewables are Cost-Competitive Levelized Cost of New Generation Over Range of Gas Prices
Levelized Cost of Energy ($/MWh)
80
NYMEX Futures Strip
70 60 Wind (without PTC)
50 40
Wind (with PTC)
30 20
Natural Gas Advanced Combined Cycle
10 0 0
Source: AEO 2004
1
2
3 4 5 Natural Gas Price ($/MMBtu)
6
Environmental Energy Technologies Division • Energy Analysis Department
7
8
Yet in High Gas Price Scenario, Coal Wins(!) Oil and Gas "Slow Tech Progress" Case Relative to Reference Case
Relative Cumulative Capacity
(GW)
20
Coal-Fired Capacity
15
Renewables Capacity
10
Gas-Fired Capacity
5 0 -5 -10 -15
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
-20
Source: EIA (AEO 2004)
Gas prices $0.20/MMBtu higher (on average) in this scenario Environmental Energy Technologies Division • Energy Analysis Department
Reason: Low Capacity Value of Wind Two implications of low capacity value: 1) Peak load growth requires resources other than wind • In a high gas price environment, likely to be coal rather than gas
2) Wind competes as a “fuel saver” against the marginal resource • In high gas price environment, coal replaces gas as the marginal resource, and wind competes against coal • Coal fuel savings not as valuable as gas fuel savings
Model ignores possibility of future carbon regulations…
Environmental Energy Technologies Division • Energy Analysis Department
Conclusions 1) Gas prices are high, volatile, unpredictable 2) Cost of renewables is steady, predictable • Achieving similar gas price stability has cost ~$0.7/MMBtu
3) Renewables reduce gas consumption and prices • Modeling studies imply that a 1% drop in gas demand leads to a 1%-3% drop in gas prices BUT…
4) Models also suggest that higher gas prices lead to more coal, not more renewables Environmental Energy Technologies Division • Energy Analysis Department
Topics 1) Uncertainty over future natural gas prices 2) The value of long-term fixed-price contracts for renewable energy 3) What impact do renewables have on gas prices? 4) What impact do high gas prices have on renewables? Environmental Energy Technologies Division • Energy Analysis Department
Natural Gas Prices Are High and Volatile 10
10
9
9 8 7
Source: NYMEX
Environmental Energy Technologies Division • Energy Analysis Department
Mar-10
Mar-09
Mar-08
Mar-07
Apr-06
Apr-05
Apr-04
0
Apr-03
0
Apr-02
1
Apr-01
1
Apr-00
2
Apr-99
2
Apr-98
3
Apr-97
3
Apr-96
4
Apr-95
4
Apr-94
5
Apr-93
5
Apr-92
6
Apr-91
6
$/MMBtu (nominal)
NYMEX natural gas futures strip on 03/04/04
Daily price history of 1st-nearby NYMEX natural gas futures contract
7
Apr-90
$/MMBtu (nominal)
8
NPC Gas Price Forecast (Henry Hub)
Environmental Energy Technologies Division • Energy Analysis Department
EIA, NYMEX Imply “Balanced Future”
7 6
REACTIVE PATH AEO 2004
5 NYMEX 4
BALANCED FUTURE
Environmental Energy Technologies Division • Energy Analysis Department
2025
2023
2021
2019
2017
2015
2013
2011
2009
2007
2005
3
2003
$/MMBtu ($2002 at Henry Hub)
8
…But Be Wary of Price Forecasts… Historical AEO Wellhead Gas Price Forecasts vs. Actual Wellhead Price
8
90
86
7
92 04
6
85
89
5 4
93 94 95
03 02 0100 99 98
87
3
97
2
96
Source: EIA
Environmental Energy Technologies Division • Energy Analysis Department
2015
2013
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1987
1985
1
1991
Actual Wellhead Price
1989
Wellhead Price (Nominal $/MCF)
91
Topics 1) Uncertainty over future natural gas prices 2) The value of long-term fixed-price contracts for renewable energy 3) What impact do renewables have on gas prices? 4) What impact do high gas prices have on renewables?
Environmental Energy Technologies Division • Energy Analysis Department
LBNL’s Accounting for Fuel Price Risk… Question: How to compare the levelized cost of fixedprice renewable to variable-price gas-fired generation? to
Current Practice:
• Cost of renewables is often compared to cost of gas-fired generation based on uncertain fuel price forecasts
Best Practice:
to
• Cost of renewables should be compared to cost of gasfired generation based on a guaranteed fuel price
How do guaranteed forward gas prices compare to uncertain gas price forecasts?? Environmental Energy Technologies Division • Energy Analysis Department
Forward Prices Exceed Price Forecasts November 2000
4.1
Natural Gas Price ($/MMBtu)
Natural Gas Price ($/MMBtu)
3.9 3.7
Implied Forward Swap Curve (Enron)
3.5
EIA Forecast (AEO 2001)
3.3 3.1 2.9 2.7 2001
2002
2003
2004
2005
2006
2007
2008
2009
4.2 3.7 3.2
Implied Forward Swap Curve (Enron)
2.7 2.2 2002
2010
Source: Enron and EIA
EIA Forecast (AEO 2002)
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: Enron and EIA
November 2002
3.8 3.6
NYMEX Futures Price (Annual Average) EIA Forecast (AEO 2003)
3.4 3.2 3.0 2003
2004
Source: NYMEX and EIA
2005
2006
October 2003
5.2
Natural Gas Price ($/MMBtu)
4.0
Natural Gas Price ($/MMBtu)
November 2001
4.7
2007
2008
5.0
NYMEX Futures Price (Annual Average)
4.8
EIA Forecast (AEO 2004)
4.6 4.4 4.2 4.0 3.8 2004
2005
2006
2007
Source: NYMEX and EIA
Environmental Energy Technologies Division • Energy Analysis Department
2008
2009
Levelized Premiums Average $0.7/MMBtu 1.0
0.7 0.6
0.8 0.7
0.5
0.6
0.4
0.5 0.4 0.3 0.2 0.1 0.0
0.3
Enron - AEO 2001 (November 2000) Enron - AEO 2002 (November 2001) NYMEX Futures - AEO 2003 (November 2002) Williams Physical Supply - AEO 2003 (November 2002) NYMEX Futures - AEO 2004 (October 2003) Average
2-Year
5-Year
6-Year
7-Year
0.2 0.1 0.0 10-Year
Contract Term Environmental Energy Technologies Division • Energy Analysis Department
Implicit Premium (¢/kWh)
Implicit Premium ($/MMBtu)
0.9
Implications Whether these premiums represent “hedge value” or something else (e.g., biased forecasts) is debatable, but does not change the fundamental implication of this work: Use forward prices, not price forecasts, when comparing the levelized costs of gas-fired and renewable generation For more information: http://eetd.lbl.gov/ea/EMS/reports/53587.pdf Environmental Energy Technologies Division • Energy Analysis Department
Topics 1) Uncertainty over future natural gas prices 2) The value of long-term fixed-price contracts for renewable energy 3) What impact do renewables have on gas prices? 4) What impact do high gas prices have on renewables?
Environmental Energy Technologies Division • Energy Analysis Department
Renewables Displace Natural Gas Theory: As renewables displace gas-fired generation, demand for natural gas declines, and the price of gas falls Date of Author Study EIA 1998 EIA 2000 EIA 2001 EIA 2001 EIA 2002 EIA 2002 EIA 2003 UCS 2001 UCS 2002 ACEEE 2003 NPC 2003
Model National RPS Used Modeled NEMS 10% by 2010 NEMS 7.5% by 2010 NEMS 10% by 2020 NEMS 20% by 2020 NEMS 10% by 2020 NEMS 20% by 2020 NEMS 10% by 2020 NEMS 20% by 2020, EE NEMS 10% by 2020 EEA 6.3% by 2008, EE EEA -
Reduction in US Gas Consumption
Gas Wellhead Price Reduction
Quads (%) in 2020
$/MMBtu (%) in 2020
1.1 (3.4%) 0.4 (1.3%) 1.5 (4.0%) 3.9 (10.8%) 0.7 (2.1%) 1.3 (3.8%) 0.5 (1.4%) 10.5 (29.7%) 0.7 (2.1%) 1.4 (5.4%) -
0.34 (12.9%) 0.19 (6.6%) 0.27 (8.4%) 0.56 (17.4%) 0.12 (3.7%) 0.22 (6.7%) 0.00 (+0.05%) 1.58 (50.8%) 0.05 (1.5%) 0.74 (22.1%) -
Average Implicit Inverse Supply Elasticity 3.6 3.2 2.2 1.5 1.3 1.3 0.1 1.7 0.9 11.5 ~4
Average inverse elasticities mostly range from ~1 to ~3: for each 1% drop in demand, gas prices fall 1%-3% Environmental Energy Technologies Division • Energy Analysis Department
Simplified Method – Inputs “Model” results, without having to run the model!! •
Gas Displacement (1 MWh RE = 0.6 MWh Gas-fired)
•
Heat Rate of Displaced Gas-Fired (7,500 Btu/kWh)
•
US Gas Consumption Forecast (from AEO)
•
Inverse Elasticity of Supply (range from +1 to +3)
•
US Gas Wellhead Price Forecast (from AEO)
•
Wellhead to Delivered Prices (1:1) Environmental Energy Technologies Division • Energy Analysis Department
Simplified Method – Results
Change in Gas Price, All Sectors (2002 $/MMBtu)
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
Aggregate Impact of Current State RPS on Gas Prices
0.00
US Savings in 2025 (2002$) : $1.6 Billion ($20/MWh)
-0.02 -0.04 -0.06
$3.3 Billion ($39/MWh)
-0.08 -0.10 -0.12 -0.14 -0.16
Inverse Supply Elasticity = 1.0 Inverse Supply Elasticity = 2.0 Inverse Supply Elasticity = 3.0
$4.9 Billion ($59/MWh)
Environmental Energy Technologies Division • Energy Analysis Department
Topics 1) Uncertainty over future natural gas prices 2) The value of long-term fixed-price contracts for renewable energy 3) What impact do renewables have on gas prices? 4) What impact do high gas prices have on renewables?
Environmental Energy Technologies Division • Energy Analysis Department
With Gas Prices this High… 10
10
9
9 8 7
Source: NYMEX
Environmental Energy Technologies Division • Energy Analysis Department
Mar-10
Mar-09
Mar-08
Mar-07
Apr-06
Apr-05
Apr-04
0
Apr-03
0
Apr-02
1
Apr-01
1
Apr-00
2
Apr-99
2
Apr-98
3
Apr-97
3
Apr-96
4
Apr-95
4
Apr-94
5
Apr-93
5
Apr-92
6
Apr-91
6
$/MMBtu (nominal)
NYMEX natural gas futures strip on 03/04/04
Daily price history of 1st-nearby NYMEX natural gas futures contract
7
Apr-90
$/MMBtu (nominal)
8
…Renewables are Cost-Competitive Levelized Cost of New Generation Over Range of Gas Prices
Levelized Cost of Energy ($/MWh)
80
NYMEX Futures Strip
70 60 Wind (without PTC)
50 40
Wind (with PTC)
30 20
Natural Gas Advanced Combined Cycle
10 0 0
Source: AEO 2004
1
2
3 4 5 Natural Gas Price ($/MMBtu)
6
Environmental Energy Technologies Division • Energy Analysis Department
7
8
Yet in High Gas Price Scenario, Coal Wins(!) Oil and Gas "Slow Tech Progress" Case Relative to Reference Case
Relative Cumulative Capacity
(GW)
20
Coal-Fired Capacity
15
Renewables Capacity
10
Gas-Fired Capacity
5 0 -5 -10 -15
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
-20
Source: EIA (AEO 2004)
Gas prices $0.20/MMBtu higher (on average) in this scenario Environmental Energy Technologies Division • Energy Analysis Department
Reason: Low Capacity Value of Wind Two implications of low capacity value: 1) Peak load growth requires resources other than wind • In a high gas price environment, likely to be coal rather than gas
2) Wind competes as a “fuel saver” against the marginal resource • In high gas price environment, coal replaces gas as the marginal resource, and wind competes against coal • Coal fuel savings not as valuable as gas fuel savings
Model ignores possibility of future carbon regulations…
Environmental Energy Technologies Division • Energy Analysis Department
Conclusions 1) Gas prices are high, volatile, unpredictable 2) Cost of renewables is steady, predictable • Achieving similar gas price stability has cost ~$0.7/MMBtu
3) Renewables reduce gas consumption and prices • Modeling studies imply that a 1% drop in gas demand leads to a 1%-3% drop in gas prices BUT…
4) Models also suggest that higher gas prices lead to more coal, not more renewables Environmental Energy Technologies Division • Energy Analysis Department
