Energy Reports

Predictably Unpredictable: Volatility In Future Energy Supply And Price From California’s Over-Dependence On Natural Gas

9/26/2001

Executive Summary

As the new home of CALPIRG's environmental work, Environment California can be contacted with any questions regarding this report.

In response to the California energy crisis, state policy makers have rushed to approve and encourage the construction of as many natural gas power plants as possible. This could have dangerous effects on the state's long-term energy stability.

Demand for natural gas across the country is skyrocketing, and domestic supplies are tight. Because California has become more heavily dependent on natural gas for electricity production than any other state, it is particularly vulnerable to supply disruptions and price volatility. By relying so heavily on one fuel source, the state risks setting itself up for another energy crisis in the near future.

California policy makers should therefore pull back from their haste in building natural gas power plants and tap the vast instate potential for renewable energy instead. Demand for natural gas is skyrocketing.

• Natural gas consumption is growing rapidly in the U.S., with demand expected to be 60% greater in 2020 than it is today. Worldwide demand is expected to double by 2020.

• In California, use of natural gas for electricity generation has increased by 8% since 1999 and is expected to increase by another 29% over the next few years.

• Twenty-six new natural gas power plants with a combined capacity of 11,303 megawatts (MW), enough power for 7.7 million homes, have been approved since 1999.

• 94.5% of new centralized energy production currently under development will come from natural gas. Only 5.1% will come from clean renewable resources - geothermal and wind. 45% of California's electricity will be generated from natural gas when all approved new plants are built.

The U.S. has very limited supplies of natural gas.

• The U.S. Geological Survey estimates that the U.S. has 1,049 trillion cubic feet (tcf) of gas. Only 2.6% of it is in California. Only 16% of it is proved reserves.

• If demand were to grow by 2.3% per year through 2020 as predicted by the Department of Energy and stay constant thereafter, and imports from foreign nations remain around 16% of demand, this amount of gas only constitutes a 38- year supply.

• The productivity of gas wells is steadily declining. We are having to drill more wells per year just to produce the same amount of gas.

• There are 2½ times as many wells in the U.S. today as there were in 1973, but each well is only producing a third as much gas.

If well productivity continues to decline at the current rate, U.S. energy companies will have to drill more than 700,000 wells over the next twenty years to meet national production goals. This is 2.3 times as many wells as are currently in operation.

• Since we've already tapped the more accessible reserves, many of these wells will be deeper in the ground, deeper under water, and deeper into ecologically sensitive areas.

California and U.S. energy officials are knowingly instituting an energy policy that will lead to increased dependence on foreign fuel supplies.

• DOE predicts the U.S. will import 17% of its gas by 2020.

• Because of limited domestic supplies and limits to the growth rate of production, this is likely to be a vast underestimation.

• As domestic reserves become further depleted, the shortfall will undoubtedly worsen after 2020.

• California's over-dependence on natural gas will lead to steadily rising prices mixed with periodic price spikes. Although prices may drop over the next few years from their currently inflated levels, the long-term trend is expected to be upward.

• As larger gas fields are depleted, smaller ones will be more expensive to develop.

• Gas companies will increasingly have to rely on unconventional reserves requiring advanced equipment to excavate.

• Since shipping gas overseas requires liquefying the gas at -256 degrees Fahrenheit, it is very expensive.

• Gas price volatility has increased since the early 1980s as the industry has become more tied to short-term market signals.

• Occasional price spikes have always been a regular feature of the natural gas market due to periodic supply disruptions.

As we narrow the margin between growing demand and available supply, these disruptions are sure to become more frequent and severe.

The cost of renewable energy generation will steadily decline and will not be subject to price spikes. Proposals for new renewable energy projects are ready to go.

• Because renewable energy has no fuel costs, its costs are predictable and stable. Once the plants are built, producers only have to pay the regular operating and management costs to keep the power flowing.

• Both wind and solar energy costs have plummeted over the last 20 years and are predicted to continue declining. Geothermal energy costs are already very competitive and are predicted to remain steady.

• Several new renewable energy projects are currently under construction. Renewable energy companies have already presented many other proposals to the new California Consumer Power and Conservation Financing Authority.

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