NEWS RELEASE                                                                                                    DECEMBER 2012 

Future Electricity Mix Depends on the Price of Oil 

The role that gas will play in power generation depends on the price of oil as much as on other variables.

The world’s demand for electricity is rising at twice the rate of total energy consumption. Greater reliance on all generation sources will be needed in order to meet the demand. This is the conclusion reached in Fossil & Nuclear Power Generation: World Analysis & Forecast published by the McIlvaine Company.

Coal combustion will remain the leading generation technology. In the 2010-2025 period, Chinese coal-fired generation will increase by as much as its nuclear, wind and hydropower combined.

McIlvaine forecasts that new coal-fired capacity worldwide will average 160,000 MW/yr over the next ten years at a total annual investment of $300 billion. More than 50 percent of this construction will be for replacement of retiring units.

Nuclear generation will increase modestly through 2035, but the share of total capacity will drop slightly.

In the next two decades, more than 40 percent of new capacity will be based on renewable energy including solar, wind, hydro and biomass. This percentage will vary based on the real pricing. Subsidiaries for renewables will disappear. However, a carbon tax would result in more renewables.

The price of electricity is expected to rise by 0.5 to 1 percent per year. This future of gas-fired power will depend on this price plus the price of oil and the extraction cost of shale gas. Shale gas will be used in gas turbine power generation facilities only if:

  • The extraction cost is low compared to electricity prices.
  • Power generation is the highest margin use.

This production of shale gas in the Marcellus region has dropped recently because extraction costs are high relative to gas prices. The extraction costs of shale gas are greater than non-associated on-shore gas. Coal-fired generation costs will set the price of electricity. So for gas to compete, extracted costs have to be relatively low.

There are many alternative uses for gas. It can be used directly for home heating. It can be liquefied and exported (LNG). It can be converted to high quality motor fuels. If the price of oil remains at $80-$100/barrel, it will be more attractive for gas rich regions to either convert the gas-to-liquids or to liquefy and export it.

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