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PPI- Natural Gas Bridge to a Clean Energy Future - Alston 2003

PPI- Natural Gas Bridge to a Clean Energy Future - Alston 2003

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Natural Gas
Bridge to a Clean Energy Future 
by Chuck Alston
Policy Repor
June 2003
Ask a question about America’s energy future,and the likely answer is natural gas—forgenerating electricity, heating homes and businesses, fueling clean vehicles, and evenmaking the much-vaunted hydrogen futurepossible. Even fossil fuel skeptics acknowledgenatural gas as “an important bridge” to arenewable energy future.But tight supplies and higher prices areraising new questions about natural gas. Thenation has immense untapped natural gasreserves, but they are just that, untapped. Andso a recent front-page
Wall Street Journal
articlewarned: “Once thought plentiful, the UnitedStates is now facing a shortage of natural gasthat could last for years, and the impact is just beginning to ripple through an already ailingeconomy.”
1
Demand for natural gas is growing becauseit is relatively cheap, it is efficient, it is thecleanest burning fossil fuel, and the United Stateslargely meets its needs with domestic sources.These traits make it vital not only to the nation’senergy future, but also to the challenge ofreducing harmful emissions from power plants,including carbon dioxide (CO2), the chief culpritin global warming.A series of price spikes over the last two yearshave focused attention on the growing economicimportance of natural gas, its significantenvironmental benefits, and the need to betterpolice the markets that trade it. This has produceda predictable political clash as Congress considersenergy legislation. One side, led by the Bushadministration, favors supply-side solutions aboveall others, virtually ignoring commonsense efficiencymeasures to get more energy bang for the buck fromthe appliances and heating and cooling systems weuse at home and work, and downplaying legitimateenvironmental concerns as unwelcome barriers toeconomic growth. The other side, led byenvironmental groups, emphasizes efficiency, placesenvironmental values ahead of economic concerns,only begrudgingly accepts new extraction orpipeline projects, and acknowledges as anafterthought the important environmental valuesthat are driving natural gas demand and thus theneed for abundant supplies.PPI believes a Third Way approach shouldrecognize the important nexus between soundenvironmental and energy policy, give dueconsideration both to supply- and demand-sidesolutions, and press for a more transparent andcompetitive marketplace. This report focuses onnatural gas as an important case in point for howpublic policy can realize a “clean growth” strategythat is consistent with progressive goals ofabundant and affordable energy, economicprosperity, and across-the-board improvements inenvironmental quality. Based on this balancedapproach, the following policy brief recommendspolicies to:
!
Improve efficiency and reduce demand;
!
Make markets more transparent and morecompetitive;
!
Construct a natural gas pipeline from Alaska tothe lower 48 states, built and operated accordingto strict environmental standards;
!
Promote drilling in the central and western Gulfof Mexico;
 
2
Progressive Policy Institute 
www.ppionline.org
!
Support efforts to tap “unconventional” gasreserves in the Rocky Mountains in anenvironmentally sound manner;
!
Increase funding for environmental reviews,land management planning, and inspectionand enforcement of production facilities onfederal lands;
!
Support research and development forimproved extraction techniques and fortechnologies to get stranded gas to market;
!
Set a national renewable portfolio standard(RPS) for electric utilities to lessendependence on all fossil fuels, includingnatural gas; and
!
Support the development of liquefied naturalgas (LNG) in the Western Hemisphere.
The Fallout From Recent Price Shocks 
Spot prices for natural gas soared brieflyin February, increasing more than 500 percentto $18 per thousand cubic feet (Mcf) andfocusing attention on the market’s volatility.Prices have since settled back into a $5 to $6trading range. Still, that is a long way fromthe stable $2 to $2.25 per Mcf prices that largelyprevailed for more than a decade.This price volatility threatens scenarioscalling for relatively cheap natural gas to firemore power plants, heat more homes and businesses, fuel more clean cars, trucks and buses, and even make the much-vauntedhydrogen future possible. It is also wreakinghavoc with industries such as petrochemicalsand fertilizers that use gas as a feedstock.The Energy Information Administration(EIA) projects total demand for natural gaswill increase at an average annual rate of 1.8percent through 2025, from 22.7 trillioncubic feet to 34.9 trillion cubic feet.
2
The chiefreason is that electric generators are buildinggas-fired plants to meet peak load demands.This is good news for efforts to improvepublic health and slow global warming.Compared to coal-fired plants—thepredominant source of electricity—on akilowatt-hour basis of output, natural gas-firedplants emit virtually no mercury, 99 percentless sulfur dioxide, 80 percent less nitrogenoxide, and 50 percent less CO2, the chiefgreenhouse gas. Little wonder that EIAestimates natural gas will fire 80 percent ofthe new generating plants to come online between now and 2025.
3
But, as recent hot summers and cold wintershave demonstrated, the inelastic demand fornatural gas—exacerbated by what is largely a just-in-time delivery system, especially whennatural gas storage levels are low—means thatminor bumps in demand can lead todisproportionately large price spikes.In the short term, there is little governmentpolicy can do. As a General Accounting Office(GAO) analysis of the price gyrations of 2001put it: “Natural gas supply is relatively fixedin the short-term; it is limited to availablestorage and production and cannot be quicklyincreased to meet increased demand.”
4
And in the next few years prices couldremain high. The increased use of natural gasto meet summer’s peak electricity needs hasupset the traditional pattern for managingstorage. Typically, gas suppliers refilledstorage in summer, when demand and pricesonce were low, to meet heating needs for thefollowing winter.This is why it is all the more alarming thatproduction is falling. Despite higher prices,U.S. production fell 5 percent last year from2001 levels and 2003 production is expectedto lag behind 2002.
5
Higher prices haveprompted greater exploration, as the numberof drilled wells increases, but companies arenot making up for the depletion of existingwells and fields. Moreover, independent gasproducers are now responsible for asignificant majority of exploration activityhere at home, while the major companies arelargely investing abroad where they see better returns on their investment. They are betting on meeting America’s gas needs withcheap gas produced abroad, liquefied, andshipped to America via tankers.
 
3
Progressive Policy Institute 
www.ppionline.org
Why Natural Gas? 
Despite these challenges, natural gas re-mains an important answer to the question ofhow to best meet America’s need for clean en-ergy growth. According to EIA, there are nearly1,300 trillion cubic feet of technically recover-able gas reserves available (economic viabilityis another issue) in the United States alone.
6
TheNational Petroleum Council pegs reserves ateven higher levels. This is cause for optimism.The challenge for public policy is toencourage production of economically viabledomestic natural gas without unnecessarilytilting the marketplace or compromisingimportant environmental laws and values.The challenge for progressives concernedabout the environment is to recognize the balancing act: to avoid reflexive opposition toefforts to tap new natural gas reserves, includingthose on public lands, and the new pipelinesnecessary to meet the demand for clean energy.Previously, PPI has previously stated threeprinciples for a clean growth energy policy: 1)abundant and affordable energy, 2) economicprosperity, and 3) across-the-board improvementsin environmental quality. These principlesrequire ensuring a diverse fuel mix, includingalternatives to fossil fuels, and raising energyproductivity by making every BTU moreefficient with commonsense measures to easethe rate of demand growth.
7
In addition, recent events have givenAmericans a new sense of the adverseconsequences related to an inordinatedependence on foreign energy sources, as is thecase with Persian Gulf oil. To date, America hasmet its natural gas needs with North Americansupplies; roughly 84 percent of natural gasconsumed by the United States is produced inthe United States, with the balance from Canada.Only 1 percent, in the form of liquefied naturalgas (LNG), comes from outside North America.
8
Thus, the American market is insulated fromexternal supply disruptions, a situation thatcould change as demand outstrips domesticsupply and LNG imports become a significantfactor in the domestic market.For all these reasons, ample and affordabledomestic natural gas is clearly in the nation’s best interest. Until the day fossil fuel alternativesare widely available and competitively priced—and policy should seek to hasten that day—it isimperative that the environmental and healthconcerns for higher quality air that are helpingdrive natural gas demands are met by efforts toensure adequate supply.Despite the resistance of the Bushadministration, sound environmental policyshould place a premium on cleaning up the airand focus squarely on the threat CO2 emissionspose to global warming. If enacted, the leadingproposals for controlling CO2—even the Bushadministration’s weak voluntary approach—could put greater pressure on utilities to buildmore natural gas plants than current projectionsnow foresee, to meet new CO2 emissionstandards. Although a well-constructed, market- based cap-and-trade system for controlling CO2would also provide incentives for utilities todevelop cleaner-burning technologies for coal-fired plants, techniques to sequester CO2emissions, reforestation projects to absorb CO2,and alternatives to fossil fuels period, naturalgas will remain a primary fuel choice.Hence, environmentalists must recognize theinescapable policy trade-off that comes withmaking the air cleaner and arresting globalwarming: more drilling for natural gas and morepipelines to get the gas to market. It isinconsistent to support the former andreflexively oppose the latter. As the NaturalResources Defense Council (NRDC) hasrecognized, natural gas “must be regarded asan important bridge fuel to a future energysystem that relies on renewables andenvironmentally friendly sources of energy.”
9
At the same time, those who advocate onlyaggressive supply solutions must recognize thatgarnering broader support for increased drillingand more pipelines means: 1) pursuingcommonsense smart strategies to improveenergy productivity and manage demand toextend production of domestic natural gas, lestwe fall prey to the very trap we now face withoil imports; and 2) acknowledging theimportance of proper stewardship of our publiclands and recognizing that energy policy must be consistent with other importantenvironmental values.

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