IEA: Oil's role in power generation fading

Oecd Oil-Fired Generation Capacity Oil-fired electricity generation, now mainly used to meet peak and intermediate load demand, will continue to decline in Organization for Economic Cooperation and Development (OECD) countries.

This is the view of the International Energy Agency (IEA), Paris, which says the flexibility of oil-fired generation will allow it to play the role of swing supplier of electricity, just as oil is the swing supplier of primary energy.

IEA also foresees the need to find outlets for heavy refinery products, coupled with liberalization of electricity markets, thus opening new opportunities for disposal of residual refinery products through power generation.

Oil's decline

The decline of oil burning in the OECD electric power sector followed the oil price shocks of the late 1970s (see chart at left, this page [53,112 bytes]).

Oil's share of total OECD electricity generation fell from more than 20% in 1974 to less than 9% in 1994 in all but six countries-Mexico, Portugal, Italy, Japan, Greece, and Ireland-where its share ranges from 55% to 14%.

All told, says IEA, the use of oil for production of electricity had fallen throughout the OECD from 250 million metric tons/year in 1974 to 150 million tons/year in 1994.

Yet even as oil-fired electricity generation declines, it still has a useful role(see chart at right, this page [53,279 bytes]). IEA says oil is typically the most economic fuel for intermediate and peak load supply.

Coal-fired and nuclear power plants generally provide baseload power, while hydroelectric, geothermal, and natural gas-fired plants typically provide immediate load power (see chart at left, p. 37 [64,122 bytes]).

Nevertheless, for many countries lacking a substitute, oil-fired power remains a major feature of electricity supply. And in small or isolated power systems, oil often proves the cheapest fuel.

Overall within the OECD, there has been a clear incentive to reduce fuel oil use for economic and environmental reasons. Installing flue gas desulfurization (FGD) equipment in existing oil-fired plants has not generally proved economically justifiable.

Economics

The ups and downs of oil-fired power generation since the late 1970s can be linked to variations in the price of oil, says IEA.

The most recent fall in demand is linked to the economic slowdown of the early 1990s and the emergence of new gas-fired combined cycle turbine plants, which are generally more economic than oil-fired units.

An IEA study shows that new oil-fired electric power plants are generally not competitive, at any plant utilization rates, at current fuel prices (see chart at right, p. 37 [68,950 bytes]).

Even a significant drop in fuel oil prices would not change this situation, because of the high capital, operating, and maintenance costs of oil-fired steam turbine electricity plants.

Yet existing, depreciated oil-fired plants can be economic for peak load or baseload supply when retrofitted with FGD equipment, if the fuel oil price nears that of coal.

Currently this only applies to Orimulsion, a low cost natural bitumen-based fuel produced in Vene- zuela's Orinoco oil belt.

Installed initially at U.K.'s Ince B station, current electricity generating capacity of Orimulsion-fired plants worldwide is 2,000 MW.

A planned conversion of a 2,000 MW capacity plant at Pembroke, U.K., has recently been canceled by operator National Power plc, but a new 600 MW capacity Orimulsion burning unit is still planned at Brindisi, Italy.

IEA says fuel oil accounts for 80% of the oil products used in power generation. Low-sulfur crude oil, used only in Japan because it is cheaper there than fuel oil, is the next most popular fuel with 14%.

Distillate and diesel fuels together account for 4%, while other oil-derived fuels, including natural gas liquids, account for less than 2% each. Japan is also the only user of NGL for generating electricity.

Naphtha and liquefied petroleum gas (LPG) are also used almost exclusively in Japan. Sweden and U.K. are minor naphtha users, while Italy burns a little LPG.

Oil capacity

IEA points out that current utility plans within the OECD do not include any new large single fuel, oil-fired capacity (see table, p. 36 [93,718 bytes]).

Few dual-fuel and multifuel-fired plants are currently using oil as their primary fuel. These plants, according to IEA, have largely absorbed most reported decreases in oil-fired capacity since 1974.

The capacity of these plants, capable of using oil but not currently doing so, is almost twice the amount of single fuel oil-fired capacity, adding to the large existing potential oil-fired generation currently in place within the OECD.

The agency reckons that the OECD as a whole could, in principle, generate about 3 billion MW-hr of electric power using oil in storage at existing plants, consuming 13 million b/d.

This would amount to almost five times the 1994 capacity for oil-fired generation, or up to 40% of total power generation, higher than oil's share of electricity generation at its historical peak (see table, this page [107,457 bytes]).

In particular, notes IEA, underutilized and mothballed power plants represent significant generating potential, some of which could provide back-up generation if needed.

IEA examined in a recent Natural Gas Security study the potential for oil to replace lost gas-fired power generation in the event of a disruption in either Russian or Algerian gas supplies.

In its role as swing supplier of fuel for electricity generation, either in this case, or in the event of another power generation shortfall, "oil is indeed difficult to replace in the short term," noted IEA.

IEA's projection of the stock of oil-fired capacity depends on the rate of retirement of existing plants. This, in turn, depends on the actual realization of its projections on the introduction of new coal or gas-fired plants, as well as on continued reliance on the plants using the current mix of fuels.

The existing large inventory of low-utilization, oil-fired plants could economically fill the gap if IEA projections for coal or gas-fired electricity introduction were to prove too high in certain countries, or should nuclear's share of power generation be significantly reduced.

IEA does not discount, either, the possibility of new oil-fired or oil-capable plants filling the void if constraints on other fuels prevent the introduction of other plants.

Heavy oil

Discussing the future of oil-fired generation from the refiner's viewpoint, IEA notes that the power industry consumes more than half of all fuel oil used inland in the OECD and provides an important market for residual products from the refining industry.

So far, only minor shifts in power plant use of petroleum products other than fuel oil have occurred. But changes in the amounts of crude oil, Orimulsion, and other heavy products, particularly refinery residues, could develop in power generation because of new factors-notably the need to provide outlets for refinery heavy products as the trend towards lighter products increases, combined with liberalization of electricity markets.

Greater availability of heavy products could entail lower prices for certain specific products such as petroleum coke, which is increasingly used in the U.S.

IEA suggests that if a steady supply of residual product with a price approaching that of coal were available, new baseload power plants would be economically feasible.

Further utilization of heavy products could occur through integrated refining and power production, said IEA: "This would be equivalent to adding upgrading capacity to produce electricity rather than lighter products.

"Depending on specific project conditions, the combination of a refinery and tar/heavy oil gasification plant would offer economic benefits not possible in separate electricity and refinery plants."

In addition, says IEA, oil gasification plants could also supply hydrogen needed for refinery operations. The agency cites such installations at the Shell Nederland BV Pernis refinery in the Netherlands, and the Texaco Inc. petroleum coke gasification unit at El Dorado, Kan.

Electricity sales

Disposal of heavy oil residues through power generation rather than upgrading will also receive a boost from the growing trend towards deregulation of electricity markets, believes IEA.

"The sale of electricity to customers outside the refinery provides a larger outlet for residual products than that provided by internal refinery electrical consumption," said IEA.

The agency points out that, since electricity market deregulation in the U.S., refinery production of electricity has grown strongly, with 80 refinery-based power generation projects sanctioned in 1995.

Likewise, the enhanced competition in deregulated electricity markets could favor gas and oil dual-fuel firing in existing boilers. It could also encourage burning of existing generating stocks, leading to repowering of oil and mothballed oil-fired boilers. Finally, competition could boost the use of low- value vacuum residue or petroleum coke.

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