Electricity from natural gas has risks

January 26, 2014 

There's something to the old saying about not putting all your eggs in one basket, yet that's what we are doing in the case of electricity generation. Nearly all new electricity generation projects are using natural gas. This lack of diversification increases risks for the future.

Why is this happening? There are two reasons. The first is that companies and policy makers are making long-term decisions based on short-term considerations. Natural gas prices fell in 2012 to historical lows. It is foolish to expect that natural gas prices will remain at this level for the forty year or longer life of a new electricity plant, yet that is basically what people are assuming when they commit to gas-fired generation plants based on this price.

The foolishness of this is already evident. The price of natural gas rose more than 25 percent last year and has increased over 40 percent from its 2012 low, already calling into question the wisdom of some of these decisions. We can certainly anticipate that natural gas prices will increase to historical levels relative to the price of oil, which in spite of increased production in the U. S. is still priced at nearly $100 per barrel. The low natural gas prices we are seeing today, even after substantial recent increases, are unlikely to persist into the future.

The second reason that we are overly dependent on natural gas to generate electricity is environmental. While generating electricity from natural gas releases half the carbon of coal, it still accounts for a quarter of the greenhouse emissions from electricity production, and those emissions will grow as more gas is burned. Alternative sources of electricity, such as wind and solar, are only viable with substantial subsidies and come with environmental problems of their own, including visual and noise pollution and their effects on the ground as well as on birds and animals.

The rush to natural gas and the subsidies for so-called clean energy mean that nuclear power, which is perhaps the most environmentally friendly way to generate electricity given that it releases no carbon or other pollutants into the atmosphere, is not playing the major role that it should. This is the case both for traditional base load nuclear plants, of the type we have in Missouri and Illinois, and the new small modular reactors (SMRs) that should also play a role in electricity generation.

Why is this? Much of the electricity in the country is sold to power pools by generators and bought from the power pools by electricity distribution or marketing companies. The pricing that these pools are constrained to use, usually through regulation or legislation, does not place a value on environment harm or on carbon emissions. The carbon emitted by natural gas plants is not included as a cost of generating electricity, and there is no credit for the zero emissions from nuclear plants.

Furthermore, wind and solar power, for example, are heavily subsidized and still are generally not price competitive. But these subsidies further disadvantage nuclear power.

Exelon and Ameren in our region both have expertise and excellent track records operating nuclear power plants. Yet the pricing policies in effect and the environmental policies in place are favoring natural gas and heavily subsidized alternative energy while effectively penalizing nuclear power. This prevents our region from taking advantage of the expertise of our local utilities and is likely to mean that in the future our region is saddled with high-cost natural gas and alternative energy electricity generation and will not have the benefit and insurance that comes from diversified sources of electricity generation

What needs to be done? Removing subsidies for various types of generation would go a long way towards making the market more efficient. This would permit each type of electricity generation to compete on its merits. It is also necessary to include the cost of environmental harm, including especially carbon emissions, in the cost of electricity generation. Both of these changes would result in an electricity generation mix that was least cost, environmentally sound, and efficiently diversified.

Even failing those reforms, however, we must ensure that our electricity generation is not overly dependent on one fuel. Diversification will provide insurance that the region is protected against price increases for one fuel in the future. Nuclear generation has an important role to play in the future if mis-guided policies and short-term decisions do not prevent it from doing so. Putting all one's eggs in one basket is never a good idea.

Stanford L. Levin is Emeritus Professor of Economics at Southern Illinois University Edwardsville and a former Commission on the Illinois Commerce Commission, the Illinois state agency that regulates utilities including electric utilities.

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