By Cara Elias and Geoffrey Williamson

Xcel Energy’s Comanche 3, a 750 MW coal-fired power plant in Pueblo now scheduled for start-up in late March, is the first new coal-fired plant built by the utility in nearly 30 years. Yet, in light of impending federal regulation of carbon dioxide emissions, Comanche 3 may also be the last coal-fired plant built in the state. 

Colorado’s own mandate to achieve a 20 percent reduction in carbon dioxide emissions from 2005 levels by 2020, and a possible increase in that standard to 33 percent, will certainly require the development of new power generation capacity from wind, solar and other zero-carbon sources.  But reducing emissions will also involve displacing some fraction of higher-carbon coal generation with lower-carbon fuels such as natural gas. 

Natural gas generation, while often overlooked amid the buzz over renewables, will be necessary for Colorado to achieve future emissions targets.  In addition to providing lower greenhouse gas emissions than coal, natural gas offers a number of other key benefits.  Natural gas is abundant, can support intermittent renewable resources by ensuring steady output to transmission systems and the grid, and provide a secure energy source that limits reliance on international markets and sources. 

ABUNDANT SUPPLY AND PRICE SOLUTIONS

Historically, utilities have not transitioned baseload generation to natural gas for two primary reasons: declining supply and price volatility. Coal has been considered more abundant and consistently cheaper than other fuels.  However, recent technological breakthroughs have made available huge areas of once untouchable shale gas deposits.  In 2009, the Potential Gas Committee estimated domestic future supply, including increased proven reserves, to be 2,074 trillion cubic feet, 39 percent more than previous estimates and enough to meet domestic demand for 90 years at current consumption rates.  This revised supply outlook has strengthened the potential role for natural gas in Colorado’s New Energy Economy and across the nation, strengthened natural gas’s availability stature when compared to coal. 

Yet despite this rosy supply picture, extreme volatility in natural gas prices continues, and utilities have generally remained reluctant to make long-term commitments to build or expand existing gas plants. Gas prices peaked at $13 per thousand cubic feet in the summer of 2008 but oversupply and lackluster demand brought the price to $3 per thousand cubic feet by the summer of 2009.  The current price is around $5 per thousand cubic feet. Legislation addressing some of the factors that influence gas price volatility-including the inelasticity of demand response, lack of pipeline capacity, and limited storage-may be necessary in order for natural gas to achieve and sustain a price that would enable large-scale development of gas reserves.  A number of approaches could also encourage utilities to retire coal plants, including direct subsidies, a carbon tax, or a cap-and-trade program that prices carbon into power generation costs in a technology-neutral manner.  These approaches would likely provide significant incentives to power generators to enter into long-term supply and pipeline transmission contracts for natural gas, thereby steadying demand.

FIRMING RENEWABLES

The intermittent nature of renewable generation sources, along with the associated difficulty of integrating renewable energy into the grid, are key factors limiting the widespread development of renewable energy today. Natural gas generation can offer significant “firming” benefits by quickly providing energy during periods of non-production from renewable sources.  These firming benefits can be realized with a particular degree of efficiency in Colorado and the West, where many renewable resources and natural gas reserves are located in close physical proximity.

In addition to simply providing firming capabilities, there are additional ways for the natural gas industry to complement renewable sources.  For instance, depleted natural gas reservoirs located near wind turbine farms could be used for compressed air storage, overcoming intermittent wind supply issues and creating capacity for wind energy to serve as a hedge for natural gas price spikes. 

Measures to integrate natural gas generation with renewable sources would also reduce price volatility by increasing the elasticity of demand response through fuel-switching. Renewable energy sources can also serve as a hedge against natural gas price spikes, especially if storage capacity for renewable energy is increased.

ENERGY SECURITY

We continue to rely on foreign oil for approximately 60 percent of our energy needs. Switching to natural gas would provide greater energy security, as 98 percent of the natural gas used in the United States comes from North America, and 32 out of 50 states produce natural gas.  The natural gas industry also supports more than 2.8 million jobs in the United States.  Using natural gas for electrical generation in moving towards a low-carbon energy industry will not only increase emissions reductions, but also support local economies and reduce reliance on foreign fuel sources.  

FUTURE CHALLENGES

Despite the benefits of natural gas generation, environmental concerns relating to shale gas extraction, including the potential for chemical pollution of aquifers must also be addressed in order for shale development to be viable on a large-scale.  Cooperative opportunities may also exist between renewable energy and natural gas on this front.  For example, small wind turbines located near shale drilling sites could be used to pump any contaminated water to treatment facilities, helping mitigate any negative environmental impacts of shale drilling.  As part of an overall approach to developing the most effective and economic mix of energy resources to satisfy future needs, legislators may want to consider how to spur cooperation between the natural gas and renewable energy industries in situations like this. 

Colorado will face challenges to meet its “20 percent by 2020″ emission reduction goals.  Strategic use of natural gas in connection with variable renewable sources will help reduce the gap between emission reduction goals and current trends.  Colorado has advantageous geography for potential cooperation among the competing industries.  However, proactive legislation addressing natural gas price volatility that takes advantage of the relationships between natural gas and renewable energy sources might be necessary to move towards reduced carbon emissions in an effective manner. 

About the Authors: Cara Elias is an associate in Brownstein Hyatt Farber Schreck’s corporate and business department and employee benefits group. She handles federal tax credit work related to renewable energy projects. Geoffrey Williamson is an associate at Brownstein Hyatt Farber Schreck. As a member of the firm’s natural resources and water and public lands groups, his practice includes all aspects of environmental law.