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					               Multi-Pollutant Legislative Analysis:
               Natural Gas Price Sensitivity




U.S. Environmental Protection Agency
Office of Air and Radiation
April 2006
 Introduction
 • In response to concerns regarding natural gas price assumptions in EPA’s October 2005 Multi-Pollutant
   Analyses*, the Agency has conducted subsequent analysis to estimate the effects of higher natural gas
   price assumptions under three legislative scenarios:
         • Clear Skies Act of 2003 (used to represent the three versions of the Clear Skies bill and the
              regulatory scenario (CAIR, CAMR, and CAVR) examined in the comprehensive analysis).
         • Clean Air Planning Act (Carper, S.843).
         • Clean Power Act (Jeffords, S.150).
 • The following sensitivity analysis results feature these three legislative scenarios with:
         • EPA assumptions for natural gas prices at Henry Hub (wellhead).
         • 75% scale-up from EPA assumptions for natural gas prices.
         • 150% scale-up from EPA assumptions for natural gas prices.
 • When conducting a sensitivity analysis, projections are compared to a Base Case with the same
   assumptions, so the impact of the assumption being investigated on the legislative scenario can be
   separated from the impact on the Base Case. Notably, the more substantial changes often occur in the
   Base Case and incremental effects of the legislative scenario are less dramatic.
 • Results of the sensitivity analysis focus on:
         • Key emissions changes resulting from higher natural gas prices (varying by bill).
         • Changes in incremental costs due to different natural gas prices.
         • Changes in generation mix in the Base Case (without legislation) and with bills due to
              alternative natural gas prices.
         • Natural gas price increases due to legislation assuming various natural gas price levels without
              legislation (Base Case).
 • To provide a better comparison to current natural gas prices, natural gas price projections for the
   sensitivities are reported in 2004 dollars, whereas, the incremental costs of the programs are presented
   in 1999 dollars. For a frame of reference, EIA’s AEO 2006 Reference Case reports average wellhead
   prices (2004 dollars) of $4.90, $4.41, and $4.78 per million Btu for 2010, 2015, and 2020, respectively.

*Individual multi-pollutant analysis packages may be found at http://www.epa.gov/airmarkets/mp.
Clear Skies 2003 Natural Gas Price Sensitivity Analysis
Findings
• Overall, under all sensitivities examined in this analysis, enactment of Clear Skies 2003 legislation would
  not significantly increase the consumption of natural gas by the power sector or fundamentally alter the
  existing mix of generation between coal, oil, natural gas and other energy sources.
• In comparing the enactment of Clear Skies 2003 legislation with a “no legislation” scenario, there
  appeared to be little effect on natural gas prices, even when such prices are increased by 75% and 150%
  of the original levels projected in the October 2005 Multi-Pollutant Analysis.
• Changing assumptions concerning the level of future natural gas prices leads to a small decrease in the
  incremental cost of the Clear Skies 2003 legislation in 2010 and a modest increase in the incremental
  cost of the legislation in 2015 and 2020 compared with previous analysis.
• Under higher natural gas assumptions, SO2 emissions would increase in 2010, while decreasing in 2020.
  This is a result of generation shifting to coal in the earlier years of the period examined – and
  correspondingly – by more flue gas desulfurization (scrubbers) coming into use to lower SO2 emissions
  by 2020. Hg emissions increase in 2010, 2015 and 2020 in both sensitivity scenarios, while NOx and
  CO2 emissions do not change significantly.
• Comparing the “no legislation” scenario to enactment of Clear Skies 2003 reveals that, using
  assumptions of higher natural gas prices for the future, enactment of legislation results in little or no
  shifting of generation to natural gas, greater pollution control on coal-fired units and the building of newer,
  cleaner-burning coal units. At the highest level of natural gas prices, there would also be an increase in
  the generation of electricity using renewable energy.
Clear Skies 2003 Projections with EPA Assumptions for
Natural Gas Prices
Clear Skies 2003 Projections with 75% Scale-up from EPA
Assumptions for Natural Gas Prices




Note: Under this scenario, NOx and CO2 emissions do not change significantly from Clear Skies 2003 with EPA’s Assumptions for Natural Gas.
Clear Skies 2003 Projections with 150% Scale-up from
EPA Assumptions for Natural Gas Prices




Note: Under this scenario, NOx and CO2 emissions do not change significantly from Clear Skies 2003 with EPA’s Assumptions for Natural Gas.
Carper Natural Gas Price Sensitivity Analysis Findings

• Similar to the original multi-pollutant analysis, this sensitivity analysis shows that enactment of the Carper
  legislation would increase natural gas prices noticeably in 2010, although the impacts are smaller in 2015
  and 2020. Under EPA assumptions for natural gas prices, the legislation would shift projected
  generation from coal to natural gas by about 240 TWh in 2010 and by about 70 TWh in 2015 and 2020.
  Under the 75% and 150% scale-ups, coal to gas generation shifting is also forecast in 2010, although
  this effect is either neutral or reversed in 2015 and 2020.
• Under the Carper legislation, the incremental costs relative to the “no legislation” scenario drop modestly
  in 2010 and are slightly higher in 2015 and 2020 when assuming higher natural gas prices during the
  period. This effect, however, is largely due to the existence of a “safety valve” in 2010 which holds
  natural gas usage down when its greater use would lead to NOx allowance values over $5,000 per ton.
  The net result of this legislative provision is that actual NOx emissions would exceed the 2010 legislative
  cap by over 300,000 tons when the safety valve prevents control costs that are at the upper end of the
  emissions reduction curve, that in part rely on fuel switching to natural gas, from exceeding a fixed level
  (e.g., $5,000 per ton). In 2015 and 2020, installation of large amounts of pollution control technology
  allow greater coal-fired generation under the Carper legislation, thereby reducing demand on natural gas
  and resulting in the slight price increase projected in these years.
• CO2 emissions rise under all scenarios examined in this analysis with increases experienced relative to
  the “no legislation” scenarios for both the 75% and 150% scale-ups of natural gas prices. There is also a
  modest rise in SO2 and Hg emissions.
• Compared with the original multi-pollutant analysis, the amount of activated carbon injection projected to
  be installed in order to control Hg emissions under the Carper legislation further exceeds what EPA
  believes is feasible.
Carper Projections with EPA Assumptions for Natural
Gas Prices
Carper Projections with 75% Scale-up from EPA
Assumptions for Natural Gas Prices




Note: Under this scenario, SO2 emissions increase to 4.0 million tons in 2010. Nationwide mercury emissions increase to 29 tons, 21 tons, and 21 tons in 2010, 2015, and 2020, respectively.
Carper Modeling Projections with 150% Scale-up from
EPA Assumptions for Natural Gas Prices




Note: Under this scenario, SO2 emissions increase to 4.3 million tons in 2010. Nationwide mercury emissions increase to 31 tons, 22 tons, and 23 tons in 2010, 2015, and 2020, respectively.
Jeffords Natural Gas Price Sensitivity Analysis Findings

• Under the original multi-pollutant analysis and all sensitivities conducted in this analysis, enactment of
  Jeffords legislation would substantially increase the consumption of natural gas and renewables. The
  existing mix of generation between coal, oil, natural gas and other energy sources would be
  fundamentally altered.
• Higher natural gas prices assumed in the 75% and 150% scenarios result in substantial increases in
  incremental costs in 2010 and 2015.
• IPM modeling projects a large amount of natural gas use and biomass, landfill gas, wind and geothermal
  to replace coal-fired generation in 2010. Incremental cost projections are driven by the high capital costs
  of bringing such capacity on-line and the costly use of more natural gas. In the 75% scenario, these
  costs are somewhat mitigated by 2020, because the early installation of a lot of renewable capacity
  lowers the amount of fuel switching to natural gas occurring in 2020 that drove the costs in the original
  case. Thus, by 2020, the incremental cost of the Jeffords legislation is close to the original cost
  projections. In the 150% scenario, the jump up of renewable capacity in between 2015 and 2020 in
  conjunction with greater natural gas use leads to a much larger cost increase in 2020.
• Overall, there are small changes in emissions of SO2, NOx, Hg and CO2 from affected sources under all
  scenarios modeled compared with projected emissions resulting from enactment of the Jeffords
  legislation in the original multi-pollutant analysis.
Jeffords Projections with EPA Assumptions for Natural
Gas Prices
Jeffords Projections with 75% Scale-up from EPA
Assumptions for Natural Gas Prices




Note: Under this scenario, nationwide mercury emissions increase to 11 tons, 12 tons, and 12 tons in 2010, 2015, and 2020, respectively. CO2 emissions decrease to 1.8 billion tons in 2010.
Jeffords Projections with 150% Scale-up from EPA
Assumptions for Natural Gas Prices




Note: Under this scenario, nationwide mercury emissions increase to 12 tons, 13 tons, and 14 tons in 2010, 2015, and 2020, respectively. CO2 emissions decrease to 1.7 billion tons in 2010.