Sunday, September 20, 2009

Fuel substitution: power plants switching to natural gas

A number of Sober Look readers have questioned the thesis of the earlier post that suggests that natural gas oversupply creates an overhang in distillates, thus pressuring crack spreads and ultimately capping oil prices. In particular some question the ability to switch between the two fuels.

Fuel switching is actually quite common at power plants, the biggest users of natural gas. Many modern power plants can switch between gas and fuel oil, and many can switch to coal as well.
EIA: A generating unit capable of burning more than one fossil fuel is referred to as a dual-fired unit. Some dual-fired units can only burn one fuel at a time (that is, the fuels are fired sequentially), while others can burn more than one fuel simultaneously (concurrent firing of different fuels). A sequentially fired unit generally uses one fossil fuel as its primary energy source, but can switch to a second fossil fuel as an alternate energy source.

In fact cheap natural gas has created an oversupply of coal as well.

source: EIA

Similarly distillates (fuel oil) inventories are building up, pressuring crack spreads:

source: EIA

Power plants and others are storing the more expensive fuel to be used in the event natural gas prices spike (because natural gas is difficult to store and not much storage is available). But for as long as gas prices remain depressed, buying gas in the spot market makes a great deal of sense for power producers, reducing the demand for other fuels.

During some periods in the past, natural gas was more expensive to burn, with coal and distillates being the preferred fuel. Natural gas at some plants was used to provide power during peak demand because gas generation could be brought online very quickly. But with the push toward a more environmentally friendly power generation, the switching capacity has increased significantly. The paper below provides an overview of both the switching capability and its use in practice. Since the paper was published, fuel switching technology has improved even more, allowing plants to respond to market prices and switch relatively quickly.

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