"The Value of
Using Coal Gasification as a Long-Term Natural Gas Hedge for Ratepayers"
David C. Rode and Paul S. Fischbeck
Natural gas has become a commodity of
extraordinary volatility, with a growing share of demand met by imports.
Demand growth resulting from the rapid expansion of gas-fired
power-generation capacity over the last decade has introduced a
substantial element of fuel price risk into basic goods (natural gas and
electricity) required by consumers, exacerbating the already-high level of
price volatility in natural gas used for heating.
Because of the highly inelastic nature of both electricity and
home-heating demand, volatility in natural gas prices can be a particular
burden to residential and commercial consumers. Despite the potentially
significant value to be gained from developing a means of limiting price
risk for consumers, there are very few alternatives available for
long-term hedging of natural gas prices. Coal gasification represents not
only a means of obtaining a large long-term supply of natural gas at a
reasonable price, but also one of the few alternatives available as a
long-term physical hedge for natural gas price volatility. In this paper
we determine the value of using coal gasification as a long-term hedge to
consumers and discuss the potential value to gas utilities. Although the
results presented in this paper can be applied generally, our analysis
focuses specifically on the value to Indiana residential and commercial
heating consumers of a proposed SNG project in Southwest Indiana.
PDF's are password protected. If you're a first-time
visitor and need a password, please click