32nd USAEE/IAEE North American Conference July 30, 2013

32nd USAEE/IAEE North American ConferenceJuly 30, 2013

Analysis of the Impacts of Shale Gas Supply under a CO2 Tax Scenario

NETL Pittsburgh PA and Morgantown WV

Chris NicholsOffice of Strategic Energy Analysis and PlanningNational Energy Technology Laboratory

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This report was prepared as an account of work sponsored by an agency of the United States Government. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of any information, apparatus, product, or process disclosed, or represents that its use would not infringe privately owned rights. Reference therein to any specific commercial product, process, or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply its endorsement, recommendation, or favoring by the United States Government or any agency thereof. The views and opinions of authors expressed therein do not necessarily state or reflect those of the United States Government or any agency thereof.

Disclaimer

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• The primary objective of the analysis is to evaluate the techno-economic impacts of the shale gas supply and the CO2 taxation on the U.S. energy system

• We applied the Environmental Protection Agency’s Nine Region MARKAL Database (EPAUS9r 2012) that was developed by EPA around the nine U.S. Census divisions.

• The paper presents the range of findings from a selection of different scenarios to examine the impacts of increased shale gas supplies, increased gas demand and a CO2 tax, based on OMB’s social cost of carbon

Overview

Source: ESPA Analysis

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• Other than the electricity sector, increased gas supply does not significantly change gas demand in the basecase – changes to model inputs are required to substantially increase gas use in the industrial and transportation sectors

• Increased gas supply does lower the price, with increased industrial demand having a minimal price increase. Large usage of gas in the transportation sector and a CO2 tax do increase price, though

• For deep CO2 reductions, CCS is an essential technology, especially if an industrial renaissance increases gas utilization

Results and insights

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Scenario Descriptions Database Modifications

BASE9R Original EPA 2012 base case scenario (resource supply and end-use demands from AEO 2012)

BASE9RHGBASE9R modification (new natural gas supply curve under conditions of abundant natural gas supply at low cost; end-use demands from AEO 2012)

Natural gas supply curves changes: in EPAUS9R2012 natural gas mining costs increase by 1.6-2.3% annually and in the modified database costs increase by 0.9-1.3% in 2005-2055.

BASEHGINBASE9RHG modification (new natural gas supply curve; high industrial demand; transportation, commercial and residential demands from AEO 2012)

We modified industrial demand and assumed that industrial demand grows faster than in EPAUS9R2012 after 2020. The assumptions on annual demand growth rates are: Chemical sector (1.9%); Primary metal (1.9%); Food (1.8%); Nonmanufacturing industry (1.4%). All other industrial demands and other sectors demands are without changes.

BSHCICNG BASEHGIN modification (governmental incentives enabling to invest in CNG vehicles and infrastructure)

We modified transportation sector profile in order CNG vehicles became a more attractive choice. In EPAUS9R 2012 investment costs for CNG technologies are increasing, so we changed investments costs on zero growth or decreasing rates (-0.1-1%) for CNG Vehicles. We also changed discount rates for few CNG technologies (decrease from 0.44 to 0.22-0.36).

BCNGCO2BSHCICNG modification (in June 2013 OMB released the revised social cost of carbon and the estimate for 2013 under the revision was $36 per ton of CO2, compared with $22 in the previous estimate)

Total energy system CO2 taxes started in 2015 ($36/tCO2 in 2005 dollars with 5.8% annual growth rate).

Scenarios

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10

15

20

25

30

35

40

45

50

55

1965 1975 1985 1995 2005 2015 2025 2035 2045 2055

TCF

Natural Gas in Primary Energy Mix

1949-2011

AEO2013

BASE9R

BASE9RHIG

BS9HIGIN

BHGINCNG

BCNGCO2T

Increased utilization in

electricity sector

Increased industrial growth

Lowered capital costs for CNG

vehicles

CO2 tax based on current social

cost of carbon

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-

5,000

10,000

15,000

20,000

25,000

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055

Qua

ntity

(PJ)

Year

BASE9R: Electricity Production by Technology Distributed Solar PV

Central Solar PV

Wind Power

Hydropower

Geothermal Power

Municipal Waste to Steam

Biomass to IGCC

Conventional Nuclear Power

Residual Fuel Oil to Steam

NGA to Combined-Cycle

NGA to Combustion Turbine

NGA to Steam Electric

Coal to Steam

Coal to Existing Steam

Electricity growth in the Basecase is driven by natural gas and some loss in coal generation from EPA regulations

8

-

5,000

10,000

15,000

20,000

25,000

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055

Qua

ntity

(PJ)

Year

BASE9RHG: Electricity Production by Technology

Distributed Solar PV

Central Solar PV

Wind Power

Hydropower

Geothermal Power

Municipal Waste to Steam

Biomass to IGCC

Conventional Nuclear Power

Residual Fuel Oil to Steam

Diesel to Combustion Turbine

NGA to Combined-Cycle

NGA to Combustion Turbine

Coal to Steam

Coal to Existing Steam

BASE9RHG

With higher gas supplies, more coal is economically pushed out and overall generation is slightly higher

9

-

5,000

10,000

15,000

20,000

25,000

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055

Qua

ntity

(PJ)

Year

BASE9RHG: Industrial Fuel Use

Electricity

Biomass

Biodiesel

Other

Kerosene

LPG

Natural Gas

Gasoline

Distillate Oil

Fuel Oil-Low S

Coal

BASE9R

Increasing gas supplies alone does not change industrial gas use substantially – modifications to industrial end-demand are

required to model an industrial renaissance

10

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055

Qua

ntity

(PJ)

Year

BASE9RHG: Transportation Fuels

Electricity

Jet Fuel

LPG

Compressed Natural Gas

Ethanol

Gasoline

Diesel

CTL Diesel

BASE9R

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055Q

uant

ity (P

J)

Year

BHGICNG: Transportation Fuels

Electricity

Jet Fuel

LPG

Compressed Natural Gas

Ethanol

Gasoline

Diesel

CTL Diesel

BASE9R

Increased gas supplies are not enough to change use of NG in transportation sector – changes to capital cost assumptions for CNG

vehicles were required to move from gasoline to NG

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0

2

4

6

8

10

12

1965 1975 1985 1995 2005 2015 2025 2035 2045 2055

$200

5/m

mcf

Wellhead Price Historical (1949-2011) and Natural Gas Marginal Costs Scenarios Projections (2010-2055)

2005-2011

BASE9R

BAS9RHIG

BSHIGIN

BHGICNG

BCNGCO2T

05

1015202530

1945 1965 1985 2005

TCF

Natural Gas Consumption

More abundant gas lowers the

price pathIndustrial use only increases

price minimally

NG use in transportation drives a large price increase

CO2 tax pushes prices back to

baseline

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0

1000

2000

3000

4000

5000

6000

7000

1965 1975 1985 1995 2005 2015 2025 2035 2045 2055

MtC

O2

Total CO2 Emissions: Historical and Projections

1973-2012

AEO2013, REFERENCE

BASE9R

BAS9RHIG

BASEHGIN

BHGICNG

BCNGCO2T

Various non-CO2 control scenarios do not move overall CO2 emissions much

CO2 tax reduces emissions by 30%, much less than the 80% reduction from 2005 levels (~1,2000 Mt)

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2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 -

5,000

10,000

15,000

20,000

25,000 Electricity Production by Fuel & Type

Solar

Wind

Hydro

Geothermal

Municipal Solid Waste

Biomass

Nuclear

Oil

Natural Gas w/CCS

Natural Gas

Coal w/CCS

Coal

Year

Qua

ntity

(PJ)

In the CO2 Tax case, CCS-based electricity provides a large portion of electricity generation

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2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 -

1,000

2,000

3,000

4,000

5,000

6,000

7,000 CO2 Emissions

Electricity Production

Industry

Commercial

Residential

Transportation

Resources

Year

Qua

ntity

(KTo

nnes

)

CCS allows the electricity sector to substantially reduce its CO2 footprint, but increased gas use in the industrial and transportation

sectors limits the total CO2 reduction potential

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Conclusions• “Socially optimal” reduction of CO2 may only be 30% by 2050,

according to the model• Energy market forecasting models may not “be ready” for shale

gas– Changes to model inputs are required to make the industrial and

transportation sectors able to accept more gas• More abundant gas shifts the price path lower, but layering new

demand shows that the price could increase substantially (not including the impacts of LNG exports)

• Natural gas can be a “bridge” to a lower-carbon future, but CCS will be required:– A large build-out of uncontrolled NG combined cycle plants in the

near-term may be a long-term problem• Mitigation options are needed in the industrial and transportation

sectors, even when natural gas supplants higher-CO2 fuels

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Primary contributors:Nadja Victor, Booz Allen

Peter Balash, NETL

Chris [email protected]

304 877-8087