Replacement of Coal by Fracgas in the Production of Electric Power - Yale Graduates in Energy

Abstract

New well drilling technologies, when utilized to fracture common shale formations promise to provide access to very large volumes of gas. Indeed, the trade press and news media have generally taken the position that “fracgas” over the next decade can add up to 800 trillion cubic feet of reserves, four times the current level of reserves, almost equally spaced over the four quadrants of the country. But estimates of reserves are notably judgmental and with respect to new finds can be over optimistic.

The key issue however is not the size of the far future reserve base, but rather if fracgas production can replace coal in electricity generation in the next few years as limits on coal sulfur and carbon oxide emissions are phased into coal plant operations. Fracgas per KWH of produced electricity has an emissions rate one quarter that of coal. Then is it going to be used in gas engines to replace shutdown coal boilers to the extent required to sustain growing electricity supply?

The answer does not lie in detailed and controversial reserve estimates. Alternatively, there are two sources of data now extent that are relevant, (1) the estimated marker price of natural and fracgas (and its relation to futures prices) and (2) the volumes of coal in power production. We use a range of values in these data series to estimate the cross elasticity of coal demand with respect to gas price, that is the percent change in coal in power production with respect to the percent change in gas price. As a result also of reviewing a number of recent such estimates, as well as our own, we conclude that there is a determined limit on coal to gas substitution far short of driving coal out of the power market.