New York City held a hearing this morning on proposed rules to limit the use of No. 4 and No. 6 oil in the city. I submitted something similar to the comments below:
Sometimes, knowing why we do a thing makes it hard to understand all the reasons that we should do that thing. This is clearly the case with the proposed rules where the primary motivation for action is certainly a desire to reduce the crippling pollution generated by the 1% of New York City buildings that burn filthy residual oil for heat, hot water and sometimes even air conditioning. However, even though the environmental and health justification for these rules is compelling, we tend to lose sight of the fact that converting from dirty, expensive residual oil to cleaner, cheaper natural gas will significantly reduce the cost of heating in our city and reduce our nation’s trade deficit. A reduction in wasteful expenditures on imported dirty oils will help to invigorate our local economy and ensure the availability of more affordable housing as a result of lowered pressure to increase rents and maintenance fees while keeping more of our money in our domestic economy (while oil is largely imported, natural gas is primarily a domestic product).
Comments from the NYU Institute of Policy Integrity teach us that: “moving all boilers from dirty residual oil to natural gas would likely save 259 lives per year.” Over a thirty‐year period, “ in excess of $22 billion worth of health benefits could be generated. The move would also deliver up to $6 billion in climate benefits over a thirty‐year period.” In addition to these savings of lives and money, a conversion from residual oil to natural gas will also bring dramatic reductions in the cost of heating our buildings. These savings could reach as high as $450 per year for every apartment or unit that is currently heated by residual oil in the city’s 10,000 Dirty Buildings. Given savings of this magnitude, it would make sense for our city’s Dirty Buildings to convert to natural gas even if there were NO environmental benefits.
Gas is and will stay significantly cheaper than oil for the foreseeable future. Forecasts by the EIA, ConEd and others show that the burner-tip cost of natural gas can be expected to stay in the range of $13 to $15 per million BTU over the next 10 to 15 years while the cost of oil will, at best, be between $20 and $25 per milllion BTU. Additionally, one should consider that when buildings convert from oil to natural gas, they typically also improve their energy management systems and thus gain between 15% and 20% additional efficiencies.
Many have noted that the costs of converting to natural gas are higher than the cost to convert from No. 6 to No. 4 or to No. 2 oil. This is certainly the case. However, it is important to look beyond the simple up-front costs and also consider the financial benefits of conversion. Converting from oil to natural gas is the only option that will result in a reduction of monthly heating bills. In most cases, the savings will be sufficient to payback the up-front costs of conversion in between 1 and 5 years. For a building that has an average up-front conversion cost of $100,000 but that gets $25,000 per year in savings by burning natural gas instead of expensive dirty oil, the payback period will be only four years and the building’s owners will enjoy a 25% simple Internal Rate of Return over the 34 year life of the new equipment. (The IRR will be higher if depreciation is considered.) There are very, very few investments available today that offer such a high rate of return.
The savings that come from converting to natural gas will be particularly valuable to the over 440 school buildings in our city that currently burn residual fuel. As everyone knows, the school budget is under tremendous pressure and we’re faced with quality cuts and teacher layoffs. Converting our schools to cheaper, cleaner natural gas would not only reduce the pollution that aggravates our children’s asthma and respiratory issues, it would also make available a savings stream that can fund much needed capital improvements, school books, or teacher’s salaries.
Some have argued that rather than converting to cleaner oil or to natural gas, our Dirty Buildings should take the more radical step of immediately switching to renewable fuels. However, the unfortunate reality is that we simply don’t yet have renewable systems that can be deployed rapidly enough to avoid the tremendous loss of life (259 lives per year) that is caused by our 10,000 Dirty Buildings and we don’t yet have technologies that can result in the kind of savings that natural gas offers. But, converting to natural gas now doesn’t prevent adopting more sustainable systems in the future. In fact, it might make such adoption easier!
Given that a conversion to natural gas is paid back in only 1 to 5 years, doing such a conversion now will provide an annual savings stream of hundreds of millions of dollars. If renewable technologies become more viable than they are today, some of our more responsible buildings should consider using accumulated savings to fund experiments with more sustainable technologies such as solar thermal, photo-voltaic or ground source heat pumps.
Some have suggested that commodity price forecasts are inherently suspect and thus we shouldn't be too swayed by the overwhelmingly consistent expert opinion that gas will remain at least $5 per million BTU cheaper than oil. Certainly, all predictions are fragile. However, in a world where we have reached “peak-oil” (i.e. world-wide oil production will never be as high as it has in the past), where energy demand continues to increase and where oil supply is susceptible to the slightest turmoil in the Middle East, Central America or Africa, we can be sure that the price of oil will do nothing but rise and fluctuate widely. Also, all indications are that even without expanding natural gas production to those parts of the Marcellus Shale that impinge on New York City’s water supply, there is and will continue to be a good supply of domestically produced natural gas available to our city.
The best outcome for our city and the one that gives buildings the most control over their energy costs would be for our 10,000 Dirty Buildings to convert to “dual-fuel,” interruptible natural gas service. This is easier than it would seem to be since over 7,000 of the Dirty Buildings already have dual-fuel burners installed even though they currently only use their burner’s oil capabilities. (Enabling gas use will require adding a gas train to the existing dual-fuel burner.) Well managed buildings should convert their oil tanks from residual fuel to the cleaner No. 2 oil and then use the cheapest fuel, natural gas, as their primary fuel. In the future, if natural gas ever becomes more expensive than oil, or if the supply of natural gas is insufficient to meet needs, buildings would simply switch their burners from gas to oil until the price or availability of gas is once again favorable. Additionally, buildings should consider funding additional energy efficiency measures and technologies with at least part of the post-payback savings stream that results from converting to natural gas. In this way, buildings will be able to have much greater control over their costs and will find themselves much less susceptible to market fluctuations -- either domestic or foreign.
In summary: These 10,000 Dirty Buildings are not only polluting our air, they are wasting money. Converting from oil to natural gas will not only save lives and contribute to cleaner air, it will also ensure more affordable housing, help reduce our nation’s trade deficit, and provide a stream of savings that can contribute to experimenting with more renewable, sustainable energy systems. These conversions are certainly justified by their environmental and climate impacts, but we should recognize that they are ALSO very well justified on their cost savings alone.