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

19 Pages Posted: 22 Aug 2011 Last revised: 24 Sep 2011

See all articles by Robert M. Ames

Robert M. Ames

Yale Graduates Energy Study Group

Anthony Corridore

Yale Graduates Energy Study Group

Edward Hirs

University of Houston - Department of Economics; Yale Graduates Energy Study Group

Paul W. MacAvoy

Yale School of Management (Deceased); Yale University, Yale Graduates Energy Study Group (Deceased)

Date Written: August 22, 2011

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.

Suggested Citation

Ames, Robert M. and Corridore, Anthony and Hirs, Edward and MacAvoy, Paul W., Replacement of Coal by Fracgas in the Production of Electric Power - Yale Graduates in Energy (August 22, 2011). Available at SSRN: https://ssrn.com/abstract=1914656 or http://dx.doi.org/10.2139/ssrn.1914656

Robert M. Ames

Yale Graduates Energy Study Group ( email )

New Haven, CT 06520
United States

Anthony Corridore

Yale Graduates Energy Study Group

New Haven, CT 06520
United States

Edward Hirs (Contact Author)

University of Houston - Department of Economics ( email )

Houston, TX 77204-5882
United States
713-961-9661 (Phone)

Yale Graduates Energy Study Group

New Haven, CT 06520
United States

Paul W. MacAvoy

Yale School of Management (Deceased)

Yale University, Yale Graduates Energy Study Group (Deceased)

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