fueling the future: An updated vision of our energy future w h a t a d i f f e r e n c e a d e c a d e m a k e s In 2001, the American Gas Foundation released a major study on the potential for market growth for natural gas titled Fueling the Future. As the study was being written, the prevailing narrative surrounding natural gas was focused on scarcity. The study gained attention largely because it went against these prevailing winds, boldly arguing the case for growing demand for natural gas an argument then largely absent from the energy policy discussion. In just over a decade, the national energy landscape has been fundamentally altered by the new accessibility of domestic shale gas resources. As recently as 2008, the United States was expected to become a major importer of liquefied natural gas by 2015. Instead, technologies for producing natural gas from unconventional shale and tight sandstone formations have unlocked recoverable resources sufficient to last 100 years at current rates of consumption. The unconventional natural gas revolution has upended long-held notions of natural gas supply and cost. In light of this, the trustees retained the services of the global information company IHS CERA to produce an independent study, revisiting the question of how we can fuel our future with natural gas.of demand growth for today s energy landscape. While other recent studies have described the potential benefits of abundant domestic natural gas, this new study which will be published in early 2014 will go further. Looking beyond conventional projections of demand, it considers technologies and potential markets that have been overlooked may 2013 American Gas 17 november 2013 American Gas 17
fueling the future or underappreciated, discussing specific opportunities across economic sectors for greater direct use of natural gas. The following sections describe the views of AGF on the role of natural gas in our energy future, drawing on information contained in the Fueling the Future study. From AGF s perspective, the study is notable because it focuses on the importance of bringing natural gas that last mile to homes and business throughout the nation; takes a look at opportunities for combined heat and power.; explores the growing market for power generation and the value that LDCs can bring to this market; considers the increased use of CNG and LNG; and zeroes in on energy-efficiency and some of the incentives, policies, and investments that will continue to fuel these efforts. It s likely that the new study will serve as a resource for gas LDCs, their customers, regulators, legislators, and other policy makers as they adjust to the new realities of the natural gas market. Look for further coverage of the report in future issues of American Gas. Dr. Kathryn Clay, executive director, American Gas Foundation. Visit agf.org for more information about this study. LDCs: THE LAST MILE There is a clear opportunity for gas LDCs to increase deliveries to existing customers and expand their systems to serve new customers. However, considerable marketing efforts and changes to regulatory policies and practices in LDC markets may be necessary to achieve this growth potential. To change historical trends and grow markets in residential and commercial sectors overall, natural gas must either increase its share of these markets through conversions from fuel oil or electricity for multifamily households and commercial customers, improvements in the economic competitiveness of natural gas furnaces versus heat pumps, installation of significant numbers of home refueling units for natural gas vehicles; or through transformational breakthroughs in fuel cells or micro combined heat and power units. To service these potential markets, additional pipeline capacity will be required. At present, the high upfront costs to LDCs and, in some cases, difficulty in obtaining regulatory approval for expansion, may slow the realization of these market opportunities. Furthermore, high installation costs can act as a barrier to oil-to-gas conversions and the adoption of direct-use technologies like NGV home refueling and micro CHP. LDCs can address these market challenges by: Working with state governments and public utility commissions to change legislative or regulatory policies that discourage servicing of new gas load, especially if that load would improve overall energy efficiency on a holistic, full-fuel cycle basis. Seeking common ground with PUCs, community leaders, financial institutions, and appliance manufacturers to reduce the impact of high upfront costs to both natural gas LDCs and consumers, which can deter conversions to natural gas, while avoiding adverse effects on existing LDC customers. Overcoming approaches in many efficiency rulemakings which discourage inter-fuel comparisons, 2010 RESIDENTIAL SECTOR NATURAL GAS CONSUMPTION (TOTAL 14 BCF PER DAY) Laundry 1% Cooking 4% 2010 COMMERCIAL SECTOR NATURAL GAS CONSUMPTION (TOTAL 9 BCF PER DAY) Cooking 7% Space Cooling 2% Water Heating 17% Source: EIA Water Heating 26% Other 11% Space Heating 69% Space Heating 63% leading to the promotion of inefficient technologies. Going forward, PUCs can assure a level playing field based on a complete efficiency paradigm for gas and electric appliances. 18 American Gas november 2013
COMBINED HEAT AND POWER Combined heat and power, also known as cogeneration, is an efficient approach to generating electricity and useful thermal energy from a single fuel source at the point of use. Instead of purchasing electricity and then burning fuel in an on-site furnace or boiler to produce thermal energy, a facility can use CHP to provide these energy products in one energy-efficient step. As a result, appropriately sited CHP can provide significant cost savings and environmental advantages over separate heat and power. There is renewed interest in CHP in the United States today. Some of the major drivers for growth of natural gas-based CHP are the advantageous price outlook for natural gas, and state and federal incentives (more than 20 states recognize CHP as part of their renewable or alternative energy, or energy-efficiency portfolio standards). Natural gas is the fuel of choice for existing CHP and has great potential for serving the nation in the future. In August 2012, President Obama issued an executive order targeting an additional 40 GW of new capacity of CHP by 2020. For CHP to grow, regulatory and policy changes are likely to be necessary, US CHP CAPACITY BY TECHNOLOGY (81,800 MW) Combustion Turbine 13% COGENERATION Fuel Input Source: ICF Less Waste COMBINED HEAT & POWER (CHP) particularly at the state level. It is important for all policy makers to recognize that there are many policies in place today that may have the unintended effect of biasing outcomes against CHP in favor of renewables or other technologies, despite the capability of CHP to deliver on the same environmental and energy security objectives. Particularly for small-scale CHP installations, new business models are likely to be required to better align the interests of customers, regulators, energy suppliers, and manufacturers and distributors of CHP technology. In Combined Cycle 50% Recip Engine 3% Boiler/Steam Turbine 34% Waste Heat Recovery 1% Figures equal more than 100% due to rounding. response to these needs, some CHP manufacturers and suppliers, or other actors, may wish to act as financing intermediaries and choose to own and operate CHP equipment, as well as selling power, heat, and steam at a discount to retail rates to the end user over a long contract period. Allowing CHP into the rate base for LDCs may be a workable solution in some jurisdictions, using new structures that could be devised to guard against stranded costs for LDCs while also attracting new capital for CHP investments. fueling chp: new business models are likely to be required to better align the interests of customers, regulators, suppliers, manufacturers, and distributors. november 2013 American Gas 19
fueling the future POWER GENERATION The power generation sector has the largest potential for increase in natural gas throughput, but gas-fired generation has a complex gasdemand profile. In order for LDCs to be meaningful participants in this sector, they must provide continued value to power producers, such as helping to balance loads, providing storage, and constructing laterals. LDCs have an opportunity to participate actively in managing the real-time delivery of natural gas, given their pre-existing portfolios of gas, working with PUCs for the appropriate regulatory modifications. Gas LDCs have expertise in the construction of distribution pipelines and the real time operation of fuel delivery. Power plant developers, whether they are merchant or utility, generally do not have expertise in gas delivery systems nor the desire to operate them. These are all functions for which the gas LDC or pipeline is ideally suited, the marginal cost is minimal, and the power plant operator generally lacks the expertise and the desire to perform that function. TRANSPORTATION GROWTH IN POWER SECTOR NATURAL GAS DEMAND: 2011 vs 2035 Three Cases 45 40 35 30 25 20 15 10 5 0 IHS CERA OUTLOOK Source: IHS CERA Bcf per day Gas Used to Meet Growth in Electricity Demand GAS MEETS ALL ELEC DEMAND GROWTH Gas Used to Replace Coal Generation GAS REPLACES ALL COAL GENERATION Gas LDCs in general, and especially those with on-system natural gas storage, will be positioned to help play a balancing role. As the gas and power systems work together more closely, there will be opportunities for gas LDCs to provide additional services that simplify delivering gas to the power plant. For power generators to use LDC service, one party or the other will have to incur the cost of the expanded pipeline and infrastructure necessary to extend LDC service to the power plant. This cost recovery issue could be resolved by allowing an LDC to integrate system growth opportunities from various customers. If an LDC has a number of opportunities to expand its system other than a power plant, for example, the LDC could approach its PUC with a request to integrate the cost of capital from several projects and utilize the incremental returns to build out services to more homes and businesses, essentially using the power plant as an anchor to expand LDC service into new communities. This would allow LDCs to efficiently recover some of the upfront costs associated with the new infrastructure necessary to expand service to the power generator while expanding the access to low-cost natural gas supplies to additional homes and businesses on their systems. Finally, from a climate change perspective, replacing coal-fired power generation with gas-fired generation is beneficial in reducing overall emissions. LDCs should be an important part of this dialogue. providing value to producers: ldcs have an opportunity to participate actively in managing real-time delivery of natural gas, given their pre-existing portfolios of gas. 20 American Gas november 2013
Transportation TRANSPORTATION ENERGY DEMAND BY SUB-SECTOR, 2012 Rail 2% TRANSPORTATION ENERGY DEMAND BY FUEL TYPE, 2012 Electricity.08% CNG/LNG0.2% E85.04% Marine 5% Aviation 11% Petroleum Products 97% Source: Energy Information Administration AEO 2013 Pipeline Fuel 3% On Road 79% Pipeline Fuel Natural Gas 2.68% Natural gas provides approximately a third of the primary energy used to power our nation s economy overall, yet only about 0.2 percent of the energy used to drive our transportation sector comes from natural gas. Today, there are more than 15 million natural gas vehicles in use around the globe, yet less than 1 percent of these vehicles are on U.S. roadways. Natural gas has a potential role to play in every segment of our transportation sector, including on-road use (light, medium, and heavy duty), marine, rail, and high-horsepower uses such as off-road applications, including construction and natural gas production. One of the key barriers for natural gas use in the transport sector is the lack of a national refueling infrastructure. While our nation has only about 1,200 CNG stations today, the annualized growth rate for these stations has been 11 percent since 2009. Announced investments in liquefied natural gas stations by companies such as Clean Energy and Shell will bring close to 300 LNG refueling stations along the national Interstate system by the end of 2015. More work is needed to open up these potential markets to natural gas. Assuring that natural gas fuel quality can meet the strict, uniform standards required by vehicle and engine manufacturers will be a prerequisite for growth in this sector. Technology advancements in on-board storage and home refueling could be game-changing, and greater research and development investments are needed by the government and by private actors alike. Finally, federal and state policies need to maintain a level playing field to allow natural gas vehicles a chance to compete fairly in the market place. Providing fuel-neutral provisions to incentivize the production of vehicles using all clean, domestic alternative fuels, including natural gas, in federal fuel-efficiency and environmental standards should be an element in our national energy policy. ENERGY EFFICIENCY Since the 1970s, increasing the efficiency of energy use has been a priority of national energy policy. While major gains have been achieved over the last several decades, state governments, PUCs, and gas LDCs should consider how abundant, reasonably priced natural gas can be used to improve total energy efficiency and reduce overall emissions. Policies to promote energy efficiency should be underpinned by a holistic approach that includes a full-fuel cycle analysis. Using this approach, the overall efficiency of our national energy consumption can be greatly improved through an approach that considers not only where the energy is used on site, but where the energy comes from as well as the losses that the energy encounters on its journey to the end user. A key issue to avoid is bias against the use of any fossil fuel, especially if the overall efficiency profile is more beneficial. Some parties are concerned that any increased use of fossil fuels will lead to greater emissions, while assuming that electrical generation will become increasingly benign through a shift to renewable generation. Gas LDCs need to educate policy makers on the green benefits of a shift toward natural gas until cost-effective technologies other than dispatchable gas-fired generation are developed to balance the intermittency of renewable generation. Gas LDCs can work with PUCs, policy makers, and other stakeholders, to: Adopt full-fuel cycle analyses in all energy efficiency and savings comparisons Identify opportunities for natural gas to increase overall energy-efficiency in a cost-effective manner, in particular in view of the growing disparity MBtu per 2005 $ of GDP ENERGY USE PER DOLLAR OF REAL GDP 18 16 14 12 10 8 6 4 2 0 1970 Source: EIA 1980 1990 Total Energy Consumption Energy Use per Dollar of GDP 2000 2010 110 100 between retail natural gas and retail electricity prices Work with builders, local governments, and other stakeholders to encourage use of home appliances with the most attractive lifecycle cost, beyond up-front costs Revisit and, if necessary, update the terms of cost recovery of decoupling if mechanisms seem an impediment to moving to a full-fuel cycle paradigm. 90 80 70 60 50 Quadrillion Btu november 2013 American Gas 21