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Getting Gas-Fired Power Right
Jul 16, 2015
Johannes Trueby
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Natural gas can play an important role in reducing emissions from power generation, but it’s necessary to get the economics right.

 

In the global effort to reduce greenhouse gas emissions from the power sector, one fossil fuel is playing a key role: natural gas.

Renewables are expected to provide about a third of power generated worldwide by 2040, according to the International Energy Agency (IEA). But that won’t be sufficient to achieve the climate change target of limiting the average global temperature increase to 2°C, so gas-fired plants are also part of the recommended policy mix.

“Where it is economically feasible — and where it does not pose an additional energy security risk — we can go a long way by substituting coal-fired power generation with gas-fired power generation,” says Johannes Trueby, energy analyst at the IEA.

Yet as Germany — a leader in adopting renewable power — has found, the economics of gas power aren’t always ideal. A “perfect storm” of higher-than-expected gas prices, low coal prices, low CO2 prices and weak power demand has hit the income of gas power plants, explains Trueby, who discusses his findings in a report.

In an interview, he discusses the challenge in reducing emissions from power generation, as well as some policies and technological solutions that can be considered:

How important is addressing global electricity generation when it comes to greenhouse gases, given that 40 percent of energy-related CO2 emissions come from the power sector?

Clearly the power sector is key for reducing CO2 emissions globally as it is a large emitter. In 2012, 42 percent of the global CO2 emissions came from the electricity and heat generation sector.

But the power sector also has the advantage of having already-established low-carbon technologies available — nuclear, hydropower — and emerging low-carbon technologies — solar, wind — that are taking over a growing share of electricity production.

What role should gas play in reducing emissions in the power sector, and the transition toward greater renewable power generation?

The word “transition” is an important one here. If we want to bring power sector emissions down to levels that are consistent with a 2°C target, gas is not the only solution but an important component of it. Gas releases markedly less carbon dioxide when it is burned than coal and therefore there is considerable scope for reducing CO2 emissions by switching from coal to gas in power generation. However, it is crucial to consider energy security concerns and fuel costs when designing policies that favour gas over coal in the power sector.

Germany has been a leader in integrating renewables, but the report notes that gas-powered plants have come under rising cost and falling price pressures. What are the lessons that can help inform policies in other parts of the globe.

One of the lessons learned is that energy policy should be consistent and predictable — so when investors make a decision on building a power station, they have a rough idea of what decarbonisation-strategy policymakers pursue. In Germany, for example, there was considerable uncertainty created around the future of nuclear power. Moreover, the speed of deployment of renewable energies by far exceeded the expectations of the investor community in the last couple of years.

On a positive note, at least from a systems management perspective, Germany has made progress on how to integrate renewables — how to make the systems run. A couple of years ago, some market observers were warning of large-scale blackouts in Germany, because the system would not be able to handle all the renewables. None of this has actually happened. The grid operators and generators have learned to run a system that relies on a growing amount of renewable energy.

Beyond being consistent and predictable, are there any specific policies countries should consider to get the economics right when developing gas-fired power generation?

The European system in general faces similar issues as Germany. The reliability of power supply at risk, in the sense that there is very little economic incentive to invest in new thermal power generation. Thermal power generation — be it gas-fired, coal-fired or nuclear — is needed because the fleet in Europe is relatively old, and a lot of units will need to be retired soon.

Without commenting on the specifics of the measures, it’s clear that some kind of reform is needed. There are a number of different measures that could bring the desired result.

One that is very actively discussed is the introduction of a capacity mechanism, which already exists in various systems in the U.S. and is being introduced by several European countries, as well. A capacity mechanism remunerates the ability of a power station to generate electricity whenever it is needed — an ability that variable renewable energies such as wind and solar PV don’t have. The capacity mechanism thus provides a predictable revenue stream in addition to the revenue from power sales. This could help overcome the investment shortage.

What are some of the key technology solutions that could help address the issue?

Gas-fired power stations are already among the most flexible sources of power generation. While they could be further improved, the extra gains you can get from increasing flexibility or efficiency won’t solve the big systemic problems. Clearly, large-scale deployment of electricity storage would be a game changer. However, currently, most electricity storage technologies are not economically viable.

Another possibility would be to make electricity demand more flexible. As an electricity consumer, we cannot observe the hourly evolution of the electricity price. But consumers would potentially be willing to reduce their electricity consumption at times of very high prices when the system is tight. If you knew that the current price of electricity was $150 per megawatt hour, you might want to wait until the price drops a bit and then run the dishwasher.

That’s something that the modern IT-based solutions can do a lot to improve. There’s smart metering and real-time pricing, where you can observe what the power price is. Then you can introduce smart-grid solutions — you tell your gadget you want to run your dishwasher any time of the day, and it runs at the optimal time based on electricity demand and prices.

 

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Johannes Trueby
 
Johannes Trueby is an Energy Analyst at the International Energy Agency.