The LNG battery – better than real batteries and coal

More than 3 years ago I wrote about North America being the El Dorado of energy because of all those exciting developments in shale gas. In a sense, it also became the green beacon of the world as cheap gas has reduced coal usage significantly and might even sniff it out completely. On that matter (the demise of coal), the last word has not been spoken but the ripples gas has made are being felt throughout the coal sector as some high-level bankruptcies clearly show.

Gas-fueled power generation is all the rage because – well the fuel is so darn cheap. Except that – this is not always the case.

It’s true that if you have access to pipeline gas at the time when you need it and where you need it, then it’s a very competitive proposition. However, those gas plants are often used for peak power generation which means that their owners crank them up as soon as there is a peak in demand and a corresponding shortage of supply.

If we push this logic a little further, then we quickly find that an electricity peak does not come as an isolated event most of the time. When there is not enough power generation and there is a need for the peak units to kick it up, then there will most likely be a use-peak of other energy sources as well. It’s mostly at times of the day when people take showers, cook their breakfast or suppers, take showers, … You know the drill.

This means that peak electricity use means peak gas use as well. Power generation companies need more gas just at the moment when everyone else also needs more gas. However, the grid was built when there was a lot more coal power production around. Now, with more Natural Gas producing electricity, the gas grid is crackling at the seams because of all the strain. Also, off-take from the gas grid becomes a lot more volatile as reliance on gas for peak fuel has risen.

A tough situation for many power production companies. In the past, they just took the coal that they had piled up right beside the power generation unit, ready to be used at a moment’s notice. It was just there and the pile got replenished in times when there was low demand.

Gas on the other hand – is more “Just in time” delivery and use. The possibilities for short-term storage of gas are more costly than for coal as you cannot just pile it up in the yard. Well, not directly at least.

There are two ways to store gas. Either you squeeze lots of it under high pressure inside containment that must support great pressures and tends to be on the biggish and expensive side.

Or one uses LNG. In a sense, LNG is a liquid fuel like any other liquid fuel and it can be put into a tank to sit and wait until it is required. That’s not unlike the pile of coal that sits there until it can be consumed.

However, LNG requires a little more preparation than coal. Tanks cost money and the logistics are a bit more costly as well as LNG needs to be transported in specifically insulated containers to prevent an influx of heat instead of open dump carriages for coal. Even the lowest winter temperatures we know are boiling for LNG so insulation needs to be very specific.

This means that LNG will cost more than pipeline gas. But – is that true?

Because pipelines carry the cost of idleness in them. A pipeline is comparably cheap if it can be used on base-load which means that the pipeline pumps gas at or near nameplate capacity 24/7. This also means that a maximum of gas is transported.

However, variable use (and most use is variable as otherwise there would be no peaks) would require the pipeline to pump at maximum capacity at certain times and low capacity at others. The price of the pipeline capacity reflects its theoretical nameplate use. If parts of the capacity sit idle or below the nameplate at times, this idle capacity needs to be paid for during use. This makes the actual gas transport capacity sold more expensive if all the gas off-take structure comes out of the pipeline and the longer the pipeline is the worse the problem gets.

In the past – before energy utilities were liberalized – this did not matter very much as first, there was more coal, and second, there was no choice for consumers so pipeline companies just overbuilt and slapped the cost of idleness onto the consumer’s bill. With no choice, this did not matter to those running the system. Today, it does as the one with the slimmest cost stack usually sweeps the market.

Consumers today expect to be served as cheaply as possible, and they usually still want their power when they need it – no sooner and no later. Most people don’t want to change their lives to save energy. But they still want it cheap – if they can get it.

This feeds a frenzy on who can squeeze the lemon most.

The cost of pipeline gas will be wildly different depending on where, when, and who needs it. In certain situations, we must ask ourselves if LNG is not a worthy alternative. Especially when a power utility needs the gas but cannot get it as the gas pipeline is stretched out and needs to ration capacity. When they resort to diesel to avoid penalties, LNG should be strongly considered.

Let’s assume a mid-sized gas-fired peak shaver. Its sole purpose is to provide electricity when there is peak power use which is for a few hours a day and a little more so in certain seasons than others. It needs to earn its entire investment from those few hours a day. If now this peak shaver cannot get the gas it needs to run on at precisely the times when there is a peak and hence increased pipeline congestion as well, then its entire business model falls apart. When diesel plants need to be fired up to avoid additional penalties it gets really ugly.

Utilities have built up elaborate systems and specialized manpower to deal with those situations but this is expensive too. Costs are piling up, and we are still in a pure pipeline system. And there are limits to what can be done by only tweaking what you have.

Let’s just assume for a moment that the power plant had all the fuel it needed for covering a peak right in the yard just as it was with the coal minus the dirt, the pollution, and the bad reputation that coal brings.

LNG can do this. An LNG tank on the site is gas on standby that you can draw down when you need it, by as much as you need it. It’s a bit like a battery – ready to give its energy content when required. Reliably, cleanly, almost at the flick of a switch.

Now again, what’s the cost factor? That again depends strongly on every power plant’s situation. How far is the potential LNG supply away? How serious is the penalty situation? What’s the cost of alternatives? What transport options? Any underground gas storage close by?

North America has become an LNG exporter now and at the same time, the world enters into the biggest LNG glut ever. This means that some US-produced LNG might be better used to soften the impact of the Duck Curve and the strain the renewable wave brings to the US itself. Gas is part of the problem as the current pipelines cannot deliver anymore what America needs but LNG might be the cure.

And maybe, just maybe we will soon see LNG trains like the one between Kazakhstan and China running north from the Gulf delivering flexible fuel to gas-fired peak shavers. Consider this the new line pack.