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2006-07 Seminars
The Value of Using Coal
Gasification as a Long-Term Natural Gas Hedge for
Ratepayers
David C. Rode
CMU and DAI Management Consulting
Abstract
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.
Slides
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