NATURAL GAS SUPPLY ASSOCIATION

CONTACT: Charlotte LeGates

PHONE: 202/326-9316

FAX: 202/326-9334

E-MAIL: clegates@ngsa.org

Electricity restructuring bills now being proposed by members of Congress and the Administration contain several provisions that could significantly and unfairly reduce the competitiveness of gas-fired electricity. These threats stem largely from the following realities:

• Cost-driven utilities are likely to dispatch electricity from different fuel sources in order of lowest- to highest-marginal-cost. The marginal costs of gas-fired power are generally higher than the marginal costs of power fired by coal, nuclear power, and hydropower.

• Many utilities have substantial unused coal and nuclear capacity with which to compete for new markets, largely on a marginal-cost basis.

• Competition is likely to encourage utility efficiencies such as the substitution of some wheeling for gas-fired peaking.

• The lower-priced electricity expected to result from restructuring is likely to reduce the cost advantages currently enjoyed by some natural gas applications.

The resulting negative impact on gas demand may be more severe, however, if federal and/or state actions taken during the restructuring process unfairly discriminate against natural gas used for power generation or fail to correct current discrimination. Following are three areas in which current proposals could have a negative impact on legitimate competition in the energy marketplace.

Renewable Mandates Threaten to Reduce Gas Demand in Power Generation

Currently, less than one percent of U.S. electricity comes from renewables other than hydropower and waste/biomass. (When waste and biomass are included, about 3 percent of electricity is generated from renewables.) A mandatory set-aside for renewables--especially at an increased level, as suggested in a number of current federal proposals--would tend to drive from the market the highest-marginal-cost electricity, which is likely to be gas-fired. While gas-fired peaking is likely to remain viable, some replacement of gas-fired electricity by renewables is likely.

A renewable mandate equaling one percent of the current electricity marketplace is the equivalent of slightly more than 300 Bcf of natural gas annually. Thus, depending on the renewables that are included, mandate increasing renewables use to 5 percent of all electricity generated has the potential to replace between 600 Bcf and 1.5 Tcf of current gas-fired electricity; a 12 percent mandate could replace all baseload gas.

Failure to Achieve Competition by a Date-Certain and Guaranteed Uniform Access Threatens the Viability of Gas-Fired IPPs

As a normal consequence of a competitive marketplace, many gas-fired independent power producers (IPPs) will, following the expiration of current contracts, face strong competition for local markets from utilities with excess capacity and from wheeled electricity. If legislation has fostered development of a competitive national electricity marketplace by ensuring a date-certain for retail competition and by guaranteeing uniform access to an integrated grid, these IPPs should be able to compete for markets elsewhere. Failure to achieve this competitive marketplace, however, could close markets to IPPs and increase the likelihood of shut-downs.

IPPs currently use about 1.4 Tcf of gas annually for electricity generation.

Failure to Achieve Comparability in Fuel Standards Encourages the Use of Higher-Polluting Fuels at the Expense of Gas

Some of the marginal-cost advantage of coal-fired electricity rests on the fact that it is subject to less rigorous federal emissions standards than is gas-fired electricity. A truly competitive electricity marketplace demands the same standards be applied to all generators.

Equalizing standards would not necessarily make the marginal costs of gas-fired electricity equivalent to those of coal. However, equalization could improve the competitiveness of local gas-fired electricity (from both current utility capacity and IPP sources) vs. remote, wheeled, coal-fired electricity, which could be subject to significant transmission loss. Equal standards would also likely create new markets for gas used to reduce coal facilities' NO_x and SO_x emissions (through co-firing, re-burn, etc.).

This page was placed March 22, 1996; last updated August 31, 1997