Purchasing and Negotiation Training

Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

A favorite energy writer is James Osborne at the Dallas Morning News.  In a Christmas Eve 2015 story , Osborne cites a U.S. Energy Information Administration (USEIA) report that states that in April 2015, less electricity came from coal than natural gas for the first time since at least 1973. That trend repeated in July and continued through October and may do so for a while longer do to the 40% drop in Natural gas prices over 2015.

How does price of fuels affect electricity

The answer seems like it should be straight forward. Most evaluations concerning energy and sustainability rarely are. The 11-Dec-2015, Central Appalachia coal price is $43.50 per short ton according to Quandl . Coal prices range from a high of almost $50/ton (short ton of 2,000 pounds as opposed to a metric ton of 2,206 pounds) but the Central Appalachia price is a common standard.  Correspondingly, Natural gas prices out at $2.37/MMBtu according to the Henry Hub, a common benchmark.  We cannot compare prices using different units of measurement so we must convert to a common unit.

In my 2011 book, Green Purchasing and Sustainability,  I offer the Btu/$ as the best solution.  According to the USEIA, “The average heat content of coal produced in the United States in 2012 was about 20.21 million British thermal units (Btu) per short ton. The average heat content of coal consumed in 2012 was 19.55 million Btu per short ton. Assume that one ton of coal contains 20,000,000 Btus and one MMcf (Million cubic feet) of natural gas contains 1,000,000 Btus, by definition. Using the current prices the Btus/$ for one ton of coal is 20,000,000/$43.50 or about 460K Btu/$. Natural gas is 1,000,000/$2.37 or 422K Btu/$, slightly lower, but not enough to justify any massive changeover from existing technologies.

Total Cost of Ownership

Political considerations tend to be bogus so let’s stick to the economics and science. Natural gas has many advantages in both. We take science first.  The USEIA lists these carbon dioxide (CO₂) contributions with the accompanying text. “Different fuels emit different amounts of carbon dioxide (CO2) in relation to the energy they produce when burned. To analyze emissions across fuels, compare the amount of CO2 emitted per unit of energy output or heat content.”

Pounds of CO2 emitted per million British thermal units (Btu) of energy for various fuels: (per USEIA)

The science is described by USEIA this way. “Natural gas is primarily methane (CH4), which has higher energy content relative to other fuels, and thus, it has a relatively lower CO2-to-energy content.”  Expressed in common terms, this table shows that Natural gas is almost twice as clean as coal.

Now comes the TCO cost advantage. Coal must be transported from sources to end user, adding both cost and greenhouse gas emission.  Natural gas is transported via pipeline, a far less costly, more efficient, and with less greenhouse gas emissions.  Coal must be unloaded, stored for use, using belt conveyors or other devices.  Supplies must exceed average replenishment rates to account for weather, train, and other problems.  Natural gas is available on demand and has far fewer delivery problems.  On site storage is rare.

The contribution of fracking

Osborne notes that, “The shift in fuel use in the power sector comes as gas prices fall to historic lows, driven down by the flood of hydraulic fracturing and horizontal drilling operations across the Midwest and Texas.” He closes his story with this observation, “Over the past five years, natural gas-fired electricity has grown from 25 percent of the power supply to 35 percent. Over that same time, coal’s share dropped from 43 percent to 31 percent.

The next time some under-informed and self-proclaimed guardian of the environment throw stones about fracking, remind him or her that not only is it clearing a path to energy independence, but that path is less expensive and cleaner.

God Bless American ingenuity and enterprise.