Thursday, October 18, 2012

United States Energy Production (Natural Gas vs. Coal)

This election season, the economy has played a center role.  Obviously, energy is a pivotal component of economic growth, business development and also security.  Our energy powers our businesses, and cheap energy translates to cheap economic development.  In the United States, the majority of the energy produced comes from Natural Gas (NG) and coal fired power plants.  Personally, I grew up beneath the stacks of a coal fired plant in Indiana.  I've also heard a lot recently about the falling price of NG.  However, that's where my expertise ends.  Nevertheless, it has become a major issue within the 2012 election season.  It appears that many in "coal country" are vocal about the apparent decline in coal use, coal production and coal jobs.  Meanwhile, progressive voters are concerned with the environmental impact of burning fossil fuels (both NG and coal).  It should be assumed that both parties are concerned with economic development, relative costs, and security, but to varying degrees.  The endgame is that folks in coal country assert these factors should lead to a vote for Mitt Romney.  Progressives conclude that a vote for Barack Obama is in their best interest.  This negates the fact that they both may be voting for their own self-interests and not the interests of their country as a whole...

Despite my personal political views, I began to wonder...  Is it logical for a coal driven community to vote for Mitt Romney?  Has Obama declared a war on coal?  Where does natural gas fit into the energy independence equation?  What are the benefits and drawbacks of both coal and natural gas from economic, environmental, and political perspectives?

Use of NG as percentage of U.S. Electrical Generation (5)
Well, let's start with facts and physics and work out from there...  As of this writing, the price of natural gas is $3.47 per Million British Thermal Units.  That's a mouthful, and we'll try to distill it down to something useful in a minute.  For our purposes, an MBTU is just an amount of energy stored in a fuel.  For $54 dollars we can buy a ton of coal which leads to 20MBTU (This amount can vary, but 20 is the assumption used by the EIA (1)).  This amount works out to $2.7 for one MBTU via coal, and for $3.47 we get one MBTU from natural gas.  As of this writing, natural gas is about 47% more expensive than coal.  During the spring of 2012, natural gas dropped all the way to $1.91 or 44% cheaper than coal.  So clearly, there is a fair amount of variation in comparing the two prices.  At face value, and currently, natural gas does not might not seem worth the trouble.  It's 44% more expensive, and more susceptible to price fluctuation.  Nevertheless, the graphic shows the increasing share of NG as a portion of energy generation.  For a brief period in 2012, and for the first time, energy production via NG even surpassed coal.  If it's 44% more expensive, why burn it?  Clearly we'll have to move on to factors like efficiency of the generation methods, the cost of the pollutants, the cost of plants, the permits, infrastructure, transport, etc.

Before getting into the economics of coal or NG, it's helpful to understand the physics of both fuels.   We need to know the energy density of each fuel.  Well, NG has an energy density of .05 MBTU per kilogram.  While coal contains .022 MBTU per kilogram.  This means that natural gas is a nearly twice as energy dense as coal, but that's only half the equation.  If natural gas was four times as expensive (as it was in 2008), the higher density would be irrelevant from a capitalistic perspective.  However, if coal released four times as much pollution, it would be irrelevant from an environmental perspective.  There must be some balance in between or else no one would be having this conversation.  So where does that leave us, other than confused?  Well, we don't need to worry about the pricing at this point because the market takes care of that for us.  What we need to know now is this; since NG is twice as energy dense, it means to get the same amount of energy from both, we'd need to burn twice as much coal as NG.  If we needed a kilogram of NG to heat a room, we'd need two kilograms of coal.  (Again, the pricing is irrelevant, but for curiosity's sake it would currently cost 47% more than coal to heat the room with NG.  In April it would have cost 44% less to heat the room with NG.)  If price were our only concern, we'd be done.  However, we know that a greater mass of carbon based fuel, will release a greater mass of carbon based byproducts (CO2).  Therefore, if we decide to heat the room with coal, we will generate approximately twice as much CO2.  Furthermore, coal burning releases approximately 100 times the amount of SO2 than NG.

Damage caused by acid rain
In regards to the amount of pollutants released, the EPA has said the following;  “The average emissions rates in the United States from natural gas-fired generation are: 1135 lbs/MWh (Mega Watt hours) of carbon dioxide, 0.1 lbs/MWh of sulfur dioxide, and 1.7 lbs/MWh of nitrogen oxides. Compared to the average air emissions from coal-fired generation, natural gas produces half as much carbon dioxide, less than a third as much nitrogen oxides, and one percent as much sulphur oxides at the power plant.” (2)  The release of sulfur dioxide is an issue for a simple reason; it's a toxic gas.  "Sulfur dioxide is a major air pollutant and has significant impacts upon human health." (3)  " In addition the concentration of sulfur dioxide in the atmosphere can influence the habitat suitability for plant communities as well as animal life." (4)  Sulfur dioxide emissions are a precursor to acid rain and atmospheric particulates. Due largely to the US EPA’s Acid Rain Program, the U.S. has witnessed a 33% decrease in emissions between 1983 and 2002. This improvement resulted in part from flue-gas desulfurization, a technology that enables SO2 to be chemically bound in power plants burning sulfur-containing coal or oil.

In many conversations (heated rants) I've wrote on the web, I've often had to inform people of the economic concept of externalities.  Externalities are simply when the market price of a good doesn't reflect the true price to society.  The classic example of an externality is pollution.  A company produces pollution in the course of doing business, this pollution does indeed have a measurable impact on society, yet we rarely pay for it when purchasing that good.  One example where we do is the tax paid on gasoline.  Externalities aren't all bad though.  A bee keeper may provide a positive externality to the surrounding farms.  However, we do not pay the beekeeper less when purchasing honey as a trade for his services.  We may however receive a rebate in the form of cheaper crops.  Another example is vaccinations.  The more people that get vaccinated, the lower our chances of getting infected.  However, the people who buy vaccinations do not get a discount for the positive externality they are providing to society.  This concept also applies to burning fossil fuels for electricity.  The true cost to society is often obscured by the low price in the market.  While many who advocate for free markets, they do not understand market failures, or that some intervention is the only to correct these failures.

Put simply, if our number one goal was job security, coal would be a great way to begin.  It's cheap, plentiful, and very polluting if unregulated.  The first two are obviously benefits to the labor market, but so is the last!  By increasing pollution, more people would get sick, more acid rain would fall, we would need more healthcare positions, more workers to repair corrosion damage, more jobs would open due to sickness and death.  One can see this policy would be akin to not releasing a cure for cancer because we would eliminate research jobs.  We could literally be abuzz with economic activity!  Would this activity actually increase our economic wealth, productivity, or standard of living?  Doubtful.  It's easy to see that the costs of a zero environmental policy would actually be higher than current policy.

On the other hand, what if we wanted to cut all, or nearly all, of our sulfur dioxide emissions?  Well, eliminating coal would be a great place to start.  Shortly afterward, the nation would begin to go dark as we were unable to ramp up alternate methods of electrical generation.  The prices of natural gas would skyrocket as demand surged.  As a direct result, the price of electricity would drastically increase.  Many factories would layoff thousands of workers.  Goods produced in the United States would increase in price.  Exports would drop, and so on.  Again it is obvious to see that a zero sulfur policy would also be more costly than the current policy.

U.S. imports and exports of coal
The only sane conclusion is that we as a society are willing to accept a certain level of sulfur dioxide and carbon dioxide in return for affordable energy.  However, to say that we should not regulate coal production would clearly be more costly than current policies.  If this seems unclear to you, so are the skies of China, to whom we export much of our coal.  China's government is obviously willing to pay a higher price for economic development than most U.S. citizens.  Harvard University conducted a study (Full cost accounting for the life cycle of coal (PDF)) examining the externalities of coal use for energy and estimated that the externality cost to the U.S. was from $175 to $500B per year (up to half of our yearly deficit).  They estimated that the true cost of coal, should be between $0.09 and $0.27 per kWh, which is 3-10 times greater than current costs.  Again, these costs are real, measurable, and tangible in terms of healthcare, pollution, opportunity cost, hospital visits, asthma, death, etc.  These costs are already being paid by the public, even if they're not reaping the benefits.  It has rarely been the policy of the United State to let the combined welfare of a few overrule the welfare of society as a whole.  While the government doesn't always allocate resources in the most efficient manner, these costs to the public are the rationale behind increasing regulations.  

In conclusion, politicians have definitely made it more expensive and more difficult to build and run a coal fired power plant (Just how much, and if it's justified is subject to another post).  However, it is also estimated that new construction of coal fired power plants are based on a 35 year operating horizon.  Since the quality of the remaining coal has been dropping for years, new technology has made natural gas much cheaper than the past, and increasing regulation may be immanent; building a new coal plant carries a lot of risk along with expense.  While it may be true that some progressives have declared a war on coal, the market clearly plays a much larger role.  For instance, if the war on coal has already had such a large impact on the use of coal, why hasn't the price for natural gas risen with the increased demand?  If the answer is that natural gas supplies have also been rising to meet increasing demand, without an increase in cost, then why not transition to this cleaner fuel?  After all, the hallmark of capitalism is efficiency.  Obviously this market explains both the reduction in domestic use, and the rise in exportation (other country's willingness to burn coal).  I would even go as far as to say that some are using the free market to further their political agenda.  For instance Robert Murray of Murray Energy has said that “President Obama is responsible entirely for the closure of that mine and the loss of those jobs,”  Well, while it's true that the U.S. has increased regulation of coal fired power generation, exports of coal have clearly risen.  So...if exports are rising, and China is buying, why would Murray need to shutter an operational mine?  Easy; price pressure from natural gas.  Murray needs to meet his break even price, and he's not.  So instead of facing a new energy dynamic caused by changing market technology, or operating more efficiently against competitors - Murray can just blame Obama for not keeping domestic coal demand high.

So regardless of how you punch your ballot, I would expect the increase in use of natural gas to continue, along with the decrease of coal...


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