MEMORANDUM

Date:	December 16, 2011
Subject:	Limited Use Oil-fired EGUs
From:	Nick Hutson, ESG/SPPD/OAQPS
To:  	EPA-HQ-OAR-2009-0234


      The attached Microsoft(R) Excel file [`limited use oil.xlsx'] contains two worksheets. The first includes all oil-fired units that have reported fuel usage information to EPA. It identifies all the units with capacity factors below five percent in 2010, all the units with capacity factors between five and ten percent and the units with capacity factors above ten percent. The second worksheet breaks out the five to ten percent units and explores the compliance costs for those units. As described in Chapter 3 of the RIA, most units are able to comply with the rule through the use of natural gas which was estimated to be the lowest cost fuel option. It is important to understand, that fuel oil use in 2010 is not likely to be representative of fuel oil use in later years. This is because projections show fuel oil prices increasing much more rapidly than those for natural gas. Shown below are the EIA's 2010 reported spread in residual oil and natural gas prices and the projected future spreads. Even in 2010, we would have projected a preference for gas over oil, however, since these are annual averages, there are likely to be times when spot prices are closer (or even reversed). As the annual average prices increase, the times where spot prices are reversed should be less, correlating to less oil use.
                                          
                                     Year
                                 Price Spread*
                                     2010
                                     $6.41
                                     2015
                                     $9.27
                                     2020
                                    $11.78
                                     2025
                                    $13.88
                                     2030
                                    $15.46
                 * EIA projected differential between annual 
                average prices for residual oil and natural gas
                                          
      Recognizing that there may be unit level supply limitations we looked at the individual plants and have annotated the spreadsheet with links pointing out that many of the units are co-located with new natural gas combined cycle (NGCC) units (or, in some cases, scheduled to be replaced by NGCC units) indicating that local supply issues should not be a problem.
      
