A new report by Washington-D.C.-based consulting firm Energy Security Analysis Inc. (ESAI) projects a “massive shift in fuel consumption” by the power generation sector to natural gas from coal to meet the carbon emissions reductions required by the Kyoto Treaty. With that shift will come a doubling of gas demand, almost certain natural gas price increases and a huge cost to the power sector, potentially $21 billion more than costs without the treaty, ESAI projects.

To date, none of the official Department of Energy and Energy Information Administration gas demand and gas price projections have included the impact of the treaty. But the impact could hardly be overstated, according to ESAI’s study titled “Electricity and Climate Change: Estimating the Effects of Compliance with the Kyoto Treaty.”

The power sector likely will be hit disproportionately hard by the treaty because it is the easiest national target: “it remains largely regulated, and therefore prone to policy and price prescriptions at government discretion. By contrast, the oil sector, which is largely unregulated, and the transportation sector that uses its products, which is too large and dispersed to easily manipulate, can only truly be structurally influenced, in the short-term, by taxes,” ESAI reasoned, noting the Clinton administration has chosen not to use average fuel efficiency (CAF) standards to influence the transportation sector. “In any case new CAF standards would require more time to show results than is available to meet Kyoto targets.”

The Kyoto Treaty calls for the U.S. to achieve a reduction of carbon emissions of 7% below the 1990 level in the period between 2008 and 2010. ESAI’s report uses 2010 as the date of treaty compliance for ease of calculation. According to EIA data, the power sector will be required to reduce its carbon emissions to 444 million tons in 2010. They currently are projected to rise to 663 million tons in 2010 from total electric generation sector carbon emissions of 477 million tons in 1990.

Given the short period of time in which to meet those goals and assuming utilities will adopt the least-cost strategy, gas-fired combined cycle generation is the only alternative available to the power sector, ESAI’s Vito Stagliano said in an interview last week. “There’s nothing else we’ve looked at that would get [the power generation sector] to the kind of cuts that would need to be done. There’s only about eight to 10 years after the ratification of the treaty. Investments in demand side management will not get you the kind of reductions that are necessary. No other power generation technology is available to do it. The only thing that would be feasible would be a massive shift from coal to natural gas.”

Some industry observers have claimed the Kyoto treaty, if ratified actually will have little or no impact on gas demand because it will trigger rapid technological innovation to improve the environmental quality of coal-fired generation and the availability of renewable energy. “That’s silly,” said Stagliano. “That is not a plausible answer. There is not an infinite number of options available, especially when you’re talking about the constrained time frame the treaty imposes. I heard.a very aggressive environmentalist say he thinks there will be millions of things like solar roofs. But none of the formulas that the environmentalists are putting forth are really all that new. We went through the solar-roof phase with the Carter administration in the 1970s, and even if you put a million solar roofs on houses between now and 2000, the resulting energy savings would be hardly noticeable. So it is a matter of fuel switching for the interim. For the long-term, then maybe the other things: maybe fuel cells and other stuff.”

Natural gas becomes the clear first choice for achievement of Kyoto Treaty requirements because each quad of gas combustion produces two thirds the level of carbon of coal, and no other fuel or currently available technology matches cost and carbon emissions combined results. Gas is the most economic and readily available choice, but the massive fuel switch required will come at an enormous cost: $10 billion per year at minimum, according to ESAI.

Essentially accepting EIA’s current forecast, the consulting firm projects power sector gas consumption without the ratification of the Kyoto Treaty will rise to 7.21 quadrillion Btus (quads) by 2010 from 2.8 quads in 1996 and 3.3 quads in 1995 (EIA). But if the treaty is ratified in its current form, gas demand will double to 15.34 quads (to fuel 2,438 kWh or 57% of total electric generation) by 2010. Total U.S. gas consumption would rise to a “stunning” 35 Tcf/year.

“Extraordinary” Capacity Increase Required

“Such an increase could be accommodated in terms of available supply, but would engender an extraordinary investment in new or expanded pipeline capacity, perhaps on the order of a crash program,” ESAI said. “Furthermore, the price effects of this level of demand increase – historically unprecedented – would be very substantial, though difficult to estimate..” While holding wellhead prices essentially flat at slightly over $2.00/MMBtu, ESAI conservatively projects gas prices paid by electric utilities would rise to over $3.50/MMBtu by 2010.

Even using EIA’s current gas price forecast of $2.84/MMBtu in 2010, the Kyoto Treaty would translate into a minimum of $9.7 billion/year (22%) increase in the cost of fuel to electric generators, ESAI said. If gas prices paid by electric generators rise to $3.59/MMBtu (1996$), power sector fuel costs would “balloon” to over $66 billion/year, or $21 billion more than cost without the Kyoto Treaty, ESAI said.

So much for the statements coming out of the White House that dismiss the costs of “climate change.” ESAI quotes President Clinton: “Protecting the climate will yield not costs, but profits; not burdens, but benefits; not sacrifice, but a higher standard of living.”

That’s “nonsense,” said Stagliano. “Protecting the climate will engender clear and present costs in every sector of the economy..”

Many Capitol Hill staffers, Congressmen and Senators, however, maintain the treaty doesn’t have a chance of being ratified. But that does not mean the Clinton Administration won’t have other avenues to pursue the objectives contained in the treaty, Stagliano noted.

“We’re staying agnostic on [whether it will be ratified]. We just wanted to get an initial sense for what it would take for one single industry to meet the target. And we did that mostly because the statements that have been coming out of the environmental community and from the White House itself and the Department of Energy have tended to say meeting the treaty objectives is not going to be all that difficult. I don’t believe that and most analysts I know in the energy sector do not believe that.

“My sense is the carbon emissions restrictions are going to come sooner or later, and the industry understands that. They’re also confronting the Phase II Clean Air Act requirements in 2000 anyway, so it does make sense for people to be resigned to the fact. If they have to make a decision on power generation, they’re likely to be almost invariably pointed to combined cycle technology that uses gas.”

For copies of the study call ESAI’s offices at (202) 682-9101. ESAI has over 100 clients. Many of its clients are oil refiners, but the firm also has clients in the utility sector and in government.

Rocco Canonica

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