"If Natural Gas is the ‘Crack Cocaine’ of the Power Industry, It Could Prove an Unhealthy Habit"
Rogers: “90% of power plants built in the last 10 years in the US have been natural gas. It’s like the crack cocaine of the power industry.”
If Jim Rogers, the CEO of Duke Energy, is right about natural gas being the crack cocaine of the power industry, then what are renewables – broccoli? The vegetable that everyone knows is good for you, but tries to avoid eating as long as possible?
The glut of gas on the market due to the “shale gas revolution” has kept prices low, making it difficult for renewable energy developers to compete on in the merchant market (i.e. spot market.) On the flip side, it’s forced manufacturers to continue improving technologies to drive down costs, and because of the “flight to quality,” has forced developers to build the best projects possible.
So what is the verdict? Is the “Golden Age” of natural gas, as the International Energy Agency calls it, going to hurt or help renewables? The analysis is very mixed. From a recent Reuters piece:
“The economic viability of a lot of the renewables are getting killed because we have too much gas in the world right now,” said Jeff Currie, global head of commodities research at Goldman Sachs.
“It’s made a lot of these other projects like solar and wind struggle in terms of their economic viability, and coal too.”
Building new gas plants was half the price of new nuclear, and much cheaper than wind and solar, said John Rowe, chairman of U.S. power company Exelon Corp. Shale gas has especially suppressed prices in the United States.
The reason is clear. Absent a high CO2 price, gas displaces as much low-carbon electricity as it does high-carbon coal. That was precisely the point made by Nobuo Tanaka, executive director of the IEA, at a London press conference:
“While natural gas is the cleanest fossil fuel, it is still a fossil fuel. Its increased use could muscle out low-carbon fuels such as renewables and nuclear, particularly in the wake of Fukushima. An expansion of gas use alone is no panacea for climate change.”
[Joe Romm: Aubrey McClendon, CEO of Chesapeake Energy, responded to Roger’s crack about crack last year, saying “coal is the heroin of that industry. But to compare that would be an insult to heroin.” Snap! With a serious CO2 price, though, natural gas overwhelmingly replaces coal. In that scenario, gas is more like morphine, than crack.]
The Guardian notes, “The IEA also warned that gas could push out renewables, if governments come under pressure to reduce renewables subsidies and opt for gas instead, as gas companies have been urging.
However, General Electric, which says it is sees a “mega-trend” in natural gas, claims just the opposite: That natural gas could actually enable more renewables. It has invested in the concentrating solar power company eSolar, and plans to integrate the technology into a combined-cycle natural gas plant with the intention of knocking coal plants out of the energy mix. Certainly, if a combination of gas and renewables can be used to compete with new coal plants and help phase out very dirty legacy power plants, the net emissions impact could be positive – that is, if research about whether the lifecycle GHG emissions of natural gas being greater than coal is wrong.
The biggest worry for the renewable energy industry, however, is whether natural gas will simply crowd renewables out of the market rather than help them. But Sam Jaffe, an analyst with IDC Energy Insights, tells Climate Progress that he believes the opposite will be true. If natural gas is the crack cocaine of the electricity industry, eventually the cost of that habit starts to catch up.
Electric power production accounted for approximately 24% of overall U.S. gas consumption. Keep in mind that much of that power production is done with peaker plants, not baseload plants. The new plants that are being built are mostly combined cycle baseload plants, thus if we were to double NG-sourced electricity over the next decade, it would actually end up with a tripling of NG consumption by the power sector. That means an overall doubling (approximately) of NG demand. There’s no way that you can double demand in a product and expect its price to remain the same.
While the IEA believes that natural gas demand can be met with conventional and unconventional resources through 2035, it believes the glut of gas will diminish by 2015, possibly driving up prices. Jaffe thinks the impact of unconventional deposits could be less than what the IEA projects:
So then you have to ask: Won’t we increase supply with the new shale deposits? The answer is no – we’ve seen domestic production increase by 30% so far due to shale wells. That production increase will continue, but it’s not an exponential curve. I think that a good cap to production increase is somewhere between 60% moderate scenario and 80% aggressive increase. Meanwhile, keep in mind that other consumers of NG are expanding dramatically too while the price is low.
Meanwhile, state-level targets should keep demand for renewables steady, assuming federal and state incentive programs remain in place. If a healthy combination of natural gas and renewables can be developed to phase out existing coal plants, Jaffe says it “should be welcomed” by the renewable energy industry.
It’s a self-containing phenomenon – if a lot of new NG power plants arrive, then the price will go up, thereby making RE more competitive with NG. Meanwhile, the construction of those new NG plants will cause old coal plants to shut down. RE has a lot of trouble competing with old coal plants that have already been paid for. In five to ten years time, RE will easily compete with NG plants. In the meantime, we’re spewing less carbon for every kWh produced by gas (as opposed to coal).
The Energy Information Administration reported earlier this month that the price of coal-fired generation had risen by 54% from $1.53 in 2005 to $2.35 in March 2011, while inflation increased by only 15%. With the cost and price of renewables continuing to fall, and natural gas prices still low, the opportunities to overtake coal are stronger than ever.
But as the IEA’s Nubuo Tanaka reminds us: “An expansion of gas use alone is no panacea for climate change.”
The focus on renewables must stay strong, lest we direct our attention away from the real problem — the uncontrolled rise of greenhouse gas emissions. The habit the world must kick is CO2 emissions.