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Higher Than Expected Natural Gas Prices Highlight Importance of Coal-Fired Power Plants

Natural gas prices have spiked upward, with broad price implications for home heating and electricity generation. According to the Energy Information Administration, on November 23, the natural gas spot price at the Henry Hub in Louisiana was $4.70 per million British thermal units (MMBtu), the highest price since a temporary spike in January 2018, and before that, the highest price since June 2014.

Natural gas is the primary space heating fuel in almost half of all U.S. households, and colder temperatures increase the consumption of natural gas for heating purposes.  In the U.S. Midwest and Northeast, where heating demand is often the greatest, data indicate that HDD for November were 17 percent to 28 percent more than the 10-year average, respectively.

The sudden increase in natural gas prices shows how volatile natural gas prices can drive up the cost of generating electricity. Although combined cycle natural gas plants are significantly more efficient than coal plants, combustion turbines are not, and this means Minnesotans will likely pay higher costs for fuel, on a per megawatt hour basis, as our state shifts from coal to natural gas for electricity generation.

Power plant efficiency is measured in something called a heat rate. The table below shows standard heat rates for different kinds of power plants. The lower the heat rate, the more efficient the power plant is. As you can see, CC gas is the most efficient. This is where the math comes in.

Coal and natural gas are often priced in dollars per million British thermal units (mmBtu). In September 2018, the delivered cost of coal to Minnesota power plants was $2.10 per mmBtu, and gas prices are $4.70 per mmbtu, according to the Energy Information Administration.

This information gives us an easy way to calculate the cost per megawatthour:

For Coal: $2.10 (cost per mmbtu) x heat rate of 10 = $21 per MWH

For CC Gas: $4.70 (cost per mmbtu) x heat rate of 6.6 (which is the standard EIA heat rate) = $31.02 per MWH

For CT Gas: $4.70 (cost per mmbtu) x heat rate of 10 =$47.00 per MWH

As you can see, generating electricity with natural gas is far more expensive than generating electricity with coal at current gas prices. In fact, natural gas prices must remain below $2.92/mmbtu at a combined cycle natural gas plant, and below $2.24 at combustion turbine plants for consumers to save money on fuel costs relative to coal.

Shutting down Minnesota’s coal-fired power plants in favor of natural gas plants exposes families and businesses to more risk in terms of paying more for electricity. The volatility of natural gas prices is a key reason why the United States has so heavily relied upon coal for electricity generation in the first place.

If Minnesota wants to remain competitive on the global stage, it needs affordable electricity, but rumblings shutting down the state’s coal fleet and adopting a 50 percent renewable energy mandate threaten to cripple the state’s heavy industries.

 

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