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Fuel Switching 



For the past two years the topic of fuel choice has been the subject of much 

 discussion in the Northwest. The origin of this debate has been the mariceting plans of the 

 retail natural gas distributors and the need for new electric generating resources in the 

 region after a decade of energy surplus. Natural gas, because of its availability, moderate 

 environmental impacts and current low price has been the fuel most often proposed for new 

 generating resources. The question of whether that fuel could be more efficiently used to 

 displace electric end-uses such as water and space heating arises in this context. 



There are four points that should be considered regarding fuel choice. First, there 

 are a variety of issues that need to be addressed before a regional policy on fuel choice is 

 implemented. Second, there are BPA pilot programs aimed at improving our knowledge 

 about the fuel choice issue. Third, because of regional diversity, fuel choice is best 

 addressed at the local utility level. Finally, natural gas utilities must begin to demonstrate 

 an increased commitment to conservation and the efficient use of natural gas. 



Although the direct use of natural gas for space and water heating may be more 

 efficient than using the same fuel in a combustion turbine to produce electricity, there is 

 more to the public policy debate than this simplified technical analysis. It is important to 

 realize that combustion turbines in the region would be displaced by nonfirm hydroelectric 

 energy or used in conjunction with high-efficiency ground source heat pumps. Both of 

 these options improve the overall efficiency of gas use as a generating fiiel. Thus, the 

 argument for fuel switching for efficiency's sake becomes less compelling. 



The decision to encourage the use of nattiral gas as a substitute for electric end-uses 

 is also a complex business decision. Many questions surround the implementation of a 

 regional fuel switching policy. Among them: The extent to which measures beyond 

 current market price signals are necessary? Currently, 95% of the new housing market 

 choosing natural gas over electricity to serve household heating needs. Given this level of 

 gas penetration, one wonders what additional steps would be economically effective. 



Other questions arise in any effort to proceed with a regional fuel choice policy. 

 What is the appropriate level of contributions from the three parties involved; the electric 

 utility, the gas utility and the customer? Should the transaction be viewed as a deferral of 

 the need to purchase new generating resources by the electric utility or the transfer of a 

 revenue stream to the gas utility? Given that customers are already responding to the price 

 differentials between natural gas and electricity, what is the likelihood that electric utilities 

 would be paying for a consumer decision that would have occurred anyway? What is the 

 correct incentive to pay if all you are achieving is the acceleration of a market trend? What 

 assurances do electric utilities have that consumers will not reverse their decision and return 

 to the electric utility at some point in the future, should the price of natural gas escalate? 

 These questions put the fiiel choice issue in a broader and more comprehensive perspective. 



