Gas price hikes

Figure 1. US natural gas prices, 1984-2004. Source: US Department of Energy, 2004 Figure 2. European natural gas prices (excluding tax), 1993-2003. Source: International Energy Agency, 2004; UK DTI, 2004

Alongside the oil price link, there lie the fundamentals of natural gas supply and demand, and growing import dependence. The International Energy Agency projects that the import share of total demand will increase to 26% in North America by 2030 (it was 1% in 2000) and will surge to 63% in Europe by the same time (36% in 2000). The squeeze is on, and a permanent period of elevated gas prices could be upon us. What would this mean for the development of cogeneration? The World Alliance for Decentralized Energy (WADE) has assessed this important issue and undertaken some quantitative economic research in its recent analysis: Cogeneration in a High Gas Price Era, available for free download from

The aim of the analysis was to assess the extent to which current and future trends of increasing gas prices might be a challenge – or an opportunity – for gas-fired cogeneration. In qualitative terms, we would expect two main observations:

  • The effect of gas prices on cogeneration would be particularly influenced by the degree of gas-fired electricity generation in a country’s overall portfolio. Those countries most dependent on gas, typically through the development of CCGT plants, will tend to suffer higher wholesale electricity prices when gas prices increase. Here, gas-fired cogeneration would be expected to suffer less, in competitive terms, than in countries where the share of gas in generation is low.
  • Cogeneration projects, through their increased efficiency, would be able to withstand the impact of rising gas prices in a more robust competitive fashion than CCGT plants.

A main purpose of our modelling was to quantify these responses.

How DG could cut costs by 40%

The US power industry has consistently made sub-optimal investment decisions over the last three decades, ignoring distributed generation in favour of centralized power, argue Thomas R. Casten and Brennan Downes. The authors have quantified the resulting capital cost and environmental penalties, and have now extended their analysis to the world – suggesting that a fully decentralized energy approach to meeting load growth to 2030 would save US$5 trillion in investment costs and cut carbon dioxide emissions by half.

We believe the conventional ‘central generation paradigm’ is obsolete, based on last century’s technology, but power industry regulations largely derive from the unquestioned belief that central generation is optimal. Meeting the world’s growing appetite for electrical power with conventional central generation will severely tax capital markets, fossil fuel markets and the global environment. The International Energy Agency’s (IEA) 2002 World Energy Outlook reference case1 – based on present policies – presents a frightening view of the next 30 years. The reference case says that world energy demand will grow by two thirds, with fossil fuels meeting 90% of the increase – see Figure 1. World electrical demand doubles, requiring construction of nearly 5000 GW of new generating capacity, equivalent to adding six times the current US electricity generating capacity. The generation alone will cost US$4.2 trillion, plus transmission and distribution (T&D) costs of $6.6 trillion (at 2004 value). Global carbon dioxide emissions increase by 70%.

The reference case assumes that the energy policies of each government in 2002 continue without change, a modest evolution of technology, and continued reliance on central generation of electrical power, which is consistent with most existing policies and regulations. The IEA projections assume that central generation is the optimal approach, given today’s technology.

The IEA report is silent on the need for the capital cost of new T&D, even though existing T&D is far from adequate. There have been 105 reported grid failures2 in the US since January of 2000, and 11 of those outages affected more that half a million people. US consumers paid $272 billion for electricity in 2003, 3 plus power outage costs, estimated between $80 billion and $123 billion per year. Outages thus add 29%-45% to the cost of US power. 4 The T&D situation is worse in developing countries, where 1.6 billion people lack any access to electrical power and many others are limited to a few hours of service per day. Satisfying expected load growth with central generation will clearly require at least comparable construction of T&D capacity.

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