Fuel Elasticities in the United States

I found a report that was prepared by the U.S. Energy Information Administration (EIA). The EIA is the statistical and analytical agency within the U.S. Department of Energy. This report explores the elasticity of three fossil fuels (coal, natural gas, and petroleum) in relation to their price, measured as the price of coal, natural gas, or petroleum per million Btu (MMBtu). MM stands for one million and Btu stands for one British thermal unit. One British thermal unite is equivalent to 1,055 joules. This is the amount of energy required to change the temperature of one pound of water by one degree Fahrenheit.

The general idea is that if the prices of these three fossil fuels change, energy  generators in different parts of the country may begin to substitute more of a cheaper fossil fuel in place of another fossil fuel they currently use.  It does not look into other factors besides price (the pecuniary factor) that could have affected the fuel composition chosen for power generation.  Some of these other potentially important factors are: available capacity, local transmission, reliability constraints, fuel purchase, power supply contracts, and environmental regulations (p. 17).  Also it is important to note that for their model “renewable energy sources are assumed to have minimal impact on generators’ choice of fossil fuel” (p.11).

 

 

Definition of elasticity

Definition of elasticity

The elasticity between two fossil fuel choices can be studied a few different ways.  You can observe the changes between two fuel choices over a period of many years.  Also, rates of adjustment (or substitution) tend to be higher during peak time periods in the year.  Figure 2 shows the electric net use fossil fuel composition during the summer months.  Similarly, Figure 3 also observes changes in elasticity specifically between natural gas and coal on a monthly basis.

Notice the return of coal in 2008.

Notice the return of coal in 2008.

04.12.14 Monthly U.S. Elasticity of Substitution between Natural Gas and Coal

Almost all of the electricity supplied in the U.S. and Canada is provided by the North American Electric Reliability Corporation (NERC).  NERC is divided into eight regional entities.  Each of these regions has a different “rate of adjustment” or elasticity when faced with the decision to change the current composition of fossil fuel in response to pecuniary changes.

Normalized formulas (4) and (5) includes lambda (λ).  This is the coefficient that “represents the generators’ rate of adjustment for each period towards reaching the desired fuel consumption level” (p.11, 12).  This is a simple table for the average cost generation percentages per fossil fuel for every region (p.13).

04.13.14 Average Generation Cost Shares per NERC region

The following table shows the cross price elasticities of substitution and dynamic rate of adjustment between each of the three fossil fuels per NERC region.

04.13.14 Estimated Cost Price Elasticities of Substitution and Dynamic Rate of Adjustment

A fossil fuel’s relative share of the total cost is determined in part by availability, something that this report does not address directly.  I think the transformations in the southeastern United States were the result of not only the flexibility of the NERCs in this region, but also due to the availability of resources.  The SERC has a high coal average generation cost share.  In addition, many of the coal deposits can also be found in this region.

Displacement of fuels (both between coal-gas and between gas-oil) was most evident in [the southeast U.S. (FRCC and SERC)] over the sample period because the region’s [sic] generating capacity and transmission infrastructure allowed the the industry to favor those power plants fueled by the lowest cost energy source” (p.15).

Here are the known coal deposits in the U.S.:

04.13.14 U.S. Coal Fields

Likewise, the link below will take you to a PDF on the EIA’s website which shows the known gas and oil deposits in the United States.

Shale Gas and Oil Plays, North America as of May 9, 2011.

 

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