Last Friday, 8th June 2007, Eirgrid published a paper on Wind Powered Generation which was subtitled ‘An analytical framework to assess generation cost implications’.
The report is a very competent analysis establishing the relative cost of electricity generated by wind energy versus by natural gas. The wild-card variable in this analysis is, of course, the variability in price of natural gas from now to 2025 the period of analysis in the report. I was very confused by the predictions for natural gas prices and so I sent EirGrid a question regarding same. The question and their answer are shown below. It’s very interesting that natural gas prices more than doubled and then halved again in one year. No wonder I was confused.
I am studying the energy market in Ireland to identify business opportunities. I need your help understanding one issue. I just read your report about the relative cost effectiveness of wind energy.The report comes out very neutral on the topic. Wind is OK in small doses but we can’t have too much because it destabilises the network. Fair enough! But the whole case of the document was comparing wind to natural gas. The authors had to estimate what the price of natural gas is going to be from now until 2025 to do the sums. They had three scenarios, best, worst and most likely. A consultancy group, Popry, was quoted as a reference for these price estimates.By my interpretation of the natural gas price prediction graph in your report:-
- Best scenario: gas will halve in price from now to 2010 and then hold that price until 2025
- Likely scenario: gas will come down by 30% between now and 2025
- Worst case: gas will go up by 25% to 2025.
Either I am reading this incorrectly, or the whole peak oil thing is not on Eirgrid’s radar. If you put a 5% increase on gas prices per annum, which I would have thought reasonable) then surely the economics swings hugely in favour of wind energy. Are you really basing your predictions on the worst case expectation that energy prices will increase less than general inflation over the next 18 years? The likely and best case scenarios seem bizarre to me.
I’m totally confused. Can you help? Please explain how I am misinterpreting your report.
Thank you for your question on our Wind Powered generation paper. We would point out that it is a contribution to the discussion on the issue of the economics of wind generation and has been discussed with industry stakeholders and that we do welcome comment.
The price forecasts are based on a period when there was a gas supply shortage in the UK. This had driven prices to historically high levels of 80 cent/therm. The forecast was that these prices would fall back again once additional gas pipeline capacity from Europe to the UK was commissioned in early 2007. So far the predictions have been correct with gas prices now down to 30 cent/therm or less (on the UK gas balancing market). The low gas price scenario continues on at this low level based on the UK ‘s ability to tap into the global gas market through the construction of large scale LNG terminals. In the long term if gas prices went to the higher levels quoted, you may see some switching to clean coal technology for electricity generation.
The paper identifies the break even price of gas to be above 80 cent. The reader can then take a own view on the probability of average gas prices over a year being in excess of 80 cent. In the long term as fossil fuels get scarce, it is fair to say that prices could be expected to rise, the unknown is by how much and when.