Top Three Reasons Cheap Natural Gas Won’t Kill Renewable Energy

Posted on  

"Top Three Reasons Cheap Natural Gas Won’t Kill Renewable Energy"

I’ll be the first to admit that cheap natural gas prices are one of the biggest short-term threats to deployment of renewable energy in the U.S. today. With a glut of gas dropping prices to historic lows, the competitiveness of technologies like wind, solar PV, and solar hot water are facing significant challenges.

But here’s the important thing to remember: The industry is being challenged, not beaten. Amidst all the hand wringing over what cheap natural gas will do to investment in renewables, we often lose sight of the fact that the cost and price of renewable energy technologies are still chasing the record price drops in natural gas. When the price of natural gas starts to climb back up (according to many estimates, it will fairly soon), renewables will be more competitive than ever.

Over the next couple of years, I believe that the age-old idiom will again be proven true: “What doesn’t kill you makes you stronger.”

Below are my top three reasons why natural gas won’t be the death of renewables.

1. Cheap gas won’t stay “cheap” for too much longer

Source: Slate.com

It’s often said that America has a 100-year supply of natural gas. However, those figures, which are based on estimates from the Potential Gas Committee, factor in “proved” reserves, “possible” reserves and “speculative” reserves. If we narrow these figures down to proven, technically-exploitable resources based upon current natural gas consumption rates, more cautious estimates put our supply at roughly 11-21 years.

With mature gas plays like the Barnett Shale and Marcellus Shale in decline or appearing to be nearing a peak, and drillers scaling back on operations because it’s not profitable to drill with such low prices, a growing number of analysts are questioning whether the U.S. gas industry is approaching peak production. Petroleum Geologist Arthur E. Berman recently wrote about the decline rates in conventional and unconventional gas fields at the Oil Drum:

“This development may expose the notion of long-term natural gas abundance and cheap gas as an illusion. The good news is that this adjustment will lead to higher gas prices in a future less distant than most believe. Higher prices coupled with greater discipline in drilling will allow operators to earn a suitable return and offer the best opportunity for supply to grow to meet future needs.”

In its latest Annual Energy Outlook, the U.S Energy Information Administration also cut estimates of unproved technically recoverable resources by 42%. As energy analyst Chris Nelder recently wrote: “Everything you know about shale gas is wrong.”

2. Renewable energy is challenged, but still competitive


Source: Institute for Local Self Reliance, using data from Lazard

Over the years, the conversation around gas has changed dramatically in renewable energy circles. For example, up until 2008 when gas prices were at their peak and wind development was soaring, the industry’s message was simple: We’re a far more cost-effective, reliable investment than gas.

But the tide turned in 2009, when gas prices started their precipitous drop. I remember the American Wind Energy Association’s annual conference in 2010, when shale gas dominated the CEO roundtable discussion. “Our single biggest challenge is improving technologies to compete with these low prices,” said one executive.

The industry clearly took the challenge seriously. Today, due to bigger turbines, more reliable equipment and better materials, the cost of wind has dropped to record lows. In fact, some developers are even signing long-term power purchase agreements in the 3 cents a kilowatt-hour range. And last fall, Bloomberg New Energy Finance projected that wind would be “fully competitive with energy produced from combined-cycle gas turbines by 2016″ under fair wind conditions.

The same technological improvements and maturation in project development in wind are driving down the cost of solar PV as well. For example, in California, solar developers have signed contracts for power below the projected price of natural gas from a 500-MW combined cycle power plant. (That projection does include a carbon price).

These trends are driving record levels of interest from investors. In 2011, for the first time ever, global investments in renewable energy surpassed investments in fossil fuels.

The bottom line: the price of renewable energy continues to come down while the projected price of natural gas is only expected to rise.

We do have to be realistic about the situation: assuming gas prices stay near record low levels for a long period of time — which they likely won’t — renewables deployment won’t grow at the rate we need it to. But if you look at the where large-scale renewables stack up with the cost of energy from peaking gas plants and combined cycle plants (chart above), you can see that the industry is still nipping at the heels of gas — even with a “revolution” underway in accessing shale resources. That’s something that can’t be ignored.

3. Natural gas is a fossil fuel and still contributes to global warming

Source: Nature

When considering our energy investment choices, it’s important for us to remember why we want renewable energy in the first place. Sure, it’s a domestic resource that empowers local communities, encourages entrepreneurial innovation, and spurs new types of economic development. But ultimately, renewables are an important tool for helping us reduce greenhouse gas emissions and combat global warming. We should never lose sight of this environmental context.

So while gas will be an important short-term tool to knock old coal plants out of the energy mix and provide a source of back up for intermittent renewables, the global warming challenge will eventually present limits to our investments in natural gas, if not this decade, then certain in the 2020s.

As we’ve pointed out numerous times, without a price on carbon, natural gas is not a bridge fuel — it is a bridge to nowhere. Under the International Energy Agency’s “Golden Age of Gas” scenario that assumes an aggressive build-out of “clean” natural gas plants, we would still see global temperatures rise 6° Fahrenheit.

While the science is still far from settled on the life-cycle emissions issue, measured emissions in some cases are well above what drillers claim (see chart above).

Even if natural gas is cleaner than coal, it is still a fossil fuel. When we get serious about addressing global warming and put a price on greenhouse gas emissions, the current economic advantages of natural gas are diminished or disappear. Last October, three center-right economists — Nicholas Z. Muller, Robert Mendelsohn, and William Nordhaus — found that with a carbon price of $27 per ton, the cost of environmental and health damages from natural gas were greater than the resource’s added value to society.

In other words, natural gas isn’t nearly as inexpensive as current prices suggest (see also “Economics Stunner: Natural Gas Damage Larger Than Its Value Added For Even Low CO2 Prices“).

Writing to 415 of the world’s biggest global warming polluters this week, global investors representing $10 trillion put it best:

“The external costs of greenhouse gas emissions will become internalized into company cash flows and profitability,” Paul Abberley, chief executive officer at Aviva Investors in London said in the statement today. ‘‘Managing greenhouse gas emissions is therefore essential to delivering sustainable shareholder returns.’’

Natural gas certainly has a role to play in this long, complicated energy transition — assuming we properly value its environmental impact. But if we listen to these forward-thinking global investors and take their call for a low-carbon strategy seriously, renewables, efficiency and demand response will not be swept aside, no matter what the short-term challenges are.

Tags:

« »

25 Responses to Top Three Reasons Cheap Natural Gas Won’t Kill Renewable Energy

  1. John Tucker says:

    Those are perhaps true, 3 is always, but without regulation to dissuade pollution Gas will likely become the new coal if not the new favored petroleum product for transportation.

    It will be a cheaper base-load fuel than grid connected renewables probably for quite some time.

    I think you should ditch the cheapest fuel wins approach.

  2. Ken says:

    I like that graphic in part 2. I wonder what the Levelized Cost of Fossil Energy without federal incentives would look like?

    • Paul Magnus says:

      Yes. We need graphs that show the true picture across the board. The current and probable cost of carbon should always be also represented in those figures.

      Show the real deal.

    • Bill Woods says:

      Not much different. US federal subsidies for coal and gas amount to about $2 per MWe-h.

  3. Dave Bradley says:

    Natural gas is NOT priced based on the cost to extract and deliver it plus some reasonable profit – it’s all about how much money can be extracted from customers. But with a whole lot of greed, inadequate market discipline and intense short term timeframes and goals, a warmer than average winter and the lingering effects of the Great Depression, there is now at least a 2% excess of gas supply, and prices have crashed. Gas at $2.50/MBtu is about 1/3 of the needed breakeven price, on average. No wonder the frackers for methane are now heading to “oily” shales, and bailing from “dry gas” shale regions. And due to the huge depletion rates for fracked shale gas wells, within 2 years those wells will only be 30% or less than the initial flow rates. So this short term glut is self-correcting…

    While your graphs with LCOE for wind turbines are supposed to be informative, they really are not. And when Federal subsidies no longer work or are no longer in effect, try adding on 5 c/kw-hr when the MACRS and either the PTC, ITC or the Section 1603 grants go away at the end of ths year…. Not good….. Without these subsidies, wind turbine electricty cannot compete against nat gas and coal at 3 to 4 c/kw-hr. Without something like a Feed-In Tariff system or else those subsidies, it’s going to be a lean few years. But at least wind in fast wind regions wind derived electricity is reasonably competitive. As for Biogas, biomass and especially PV, not even close.

    Of course, with FIT systems, that absurd so-called “competition” is not relevant with highly subsidized poluution based electricty. It turns out that the cost of wind turbines has pretty much flattened out, and once the made with slave labor Chinese PV’s are removed from consideration, PV costs are also flattening out. The way to drop the needed price of renewable electricity is to lower the cost of financing renewable systems, which are way too high due to the nutcase price risk associated with unknowable pollution based electricity prices and varying subsidies. But that is not the party line from most established environmental organizations, and the results speak for themelves..

    DB

    • Mulga Mumblebrain says:

      Dave, the Chinese are low paid labour, not ‘slave’ labour. And Chinese wages are growing strongly, and have been for several years, while US median wages are falling after stagnating for decades/ Pretty soon the ‘slave wage’ economy will be that of the USA.

    • aligatorhardt says:

      By the time coal power is charged for it’s $500 billion a year health care costs and the public costs of damages from coal ash, ocean acidification and acid rain, coal is by no means economical. Figure railroad subsidies into that as well.

  4. paul revere says:

    So pass a $27 carbon tax and use the money to subsidize the ongoing Bush tax cuts or eliminative corporate income taxes so that the republicans sign on.

    • Leif says:

      There ain’t enough money to buy off the GOP, they got ~90% as is. They will just take the money and still want more anyway. They have proven that time and time again. The Capitalistic/Corporate system as practiced must realize that they have a dog in this fight as well. In fact I am convinced the many do it is just a mandate that thy maximize profits while the getting is good.

  5. Mulga Mumblebrain says:

    This, of course, illustrates the omnicidal ‘logic’ of market capitalism. Gas becomes ‘cheap’, by externalising the hideous costs of more greenhouse emissions and the pollution of groundwater by a cocktail of toxins, but the Holy Market (‘All Praise to The Market!’)dictates that the cheaper source MUST be utilised, no matter the consequences, and the lovely billions in beautiful profits is the icing on the cake. Of course this is the sort of cake we made for a mate years ago, by squaring off a medium rare cow pat with a shovel, and covering it with marzipan (such a waste!).

    • Lou Grinzo says:

      Speaking as a card-carrying economist (no one hate me!), I have to say that the fundamental lie of the free market worshipers is their contention that the market will magically deliver the results we want. Nothing could be further from the truth, yet it’s become an unchallenged “fact” in the US.

      The market is astoundingly good at one thing: Short-term allocation of resources according to price signals. That’s it. Any notion that this allocation results in the economy and the society we want is absurd; it’s like asking your dog to be an expert at picking the right wine for dinner parties because he has an incredible sense of smell.

      Another piece of chicanery involves the term “free market”. When politicians, particularly right wingers, say it they mean “a market with little or no government interference”. What voters hear is much closer to what economists call perfect competition, which is a state in which (among other things) all buyers and sellers have the same information and no one entity is large enough to influence the market price. That’s a fantasy land, and to the limited extent we can get close to it, it relies very heavily on government intervention in the form of laws and regulations to prevent things like insider trading, lies in advertising, predatory actions, etc. The right wingers are arguing not for a fair and efficient and competitive market for all, but for a system that lets the biggest and most powerful entities (i.e. corporations) have their way with the rest of us.

      • Mulga Mumblebrain says:

        As far I’m concerned, a ‘free market’ only exists where the ‘iron laws’ of supply and demand can operate freely, without hindrance. Such a situation absolutely requires, in my opinion, as near an equal distribution of market power ie income, wealth and information, as possible. However, on the contrary ‘capitalist markets’ are predicated on as great a level of inequalities in wealth, income and information, as society can tolerate. Market fundamentalism is based on the lie of equal market power, which is in fact perverted by the weight of money power, unequally distributed, as surely as space-times is distorted by a black-hole. Market capitalist markets are rigged, and serve as mechanism by which wealth and power are transferred from the many to the few.

  6. Bill Green says:

    Certainly, natural gas will not be avaliable at today’s prices ($2.50 per MMBtu or $15 per barrel in oil equivalent terms)over the long haul, but even at a price of $6 per MMBtu, the cost to run a typical combined cycle plant is only about 4 cents per kilowatt hour. This will be hard for new renewables to beat without large continued subsidies, including loan guaranttes, production creduits, investment credits, etc, especially taking account of the dispatchability of natural gas power and the intermittency of many renewables.

    • frank says:

      According to the EIA (11/2011), the delivered price of natural gas to utilities is over $4.00 / million BTU. Some states much higher – FL, NC.
      http://www.eia.gov/electricity/monthly/

      30% of US natural gas is used to generate electricity. The rest is needed for industry, commercial, residential, fertilizer and other DOMESTIC uses – many of which have few if any good alternatives.

  7. Sasparilla says:

    I think this is definitely a shorter term problem (we’ll be lucky to have one more really cheap year). With regards to the price, supply and demand as usual are setting the price. Supply will go down after a while simply because its not profitable to produce at these prices.

    With regards to the demand side, I seem to remember that 3 huge LPG terminals were constructed in the Gulf prior to the gas shale boom (when it was assumed we needed to start importing natural gas). Someone is going to figure out how to use those terminals for export – on the international market that $2.50/MBtu price turns into $12 to $15/MBtu and then we’ll start sending it to where it earns more money (until our domestic prices go through the roof to parity at some point). Someone is going to get that done as there is way too much money to be made on the export market.

    Of course we’ll start using it as a transportation fuel for big trucks too…it’ll probably all happen at the same time and lead to an supply crunch at the time. ;-)

    Of course the preferred solution would be to leave it in the ground, but that just isn’t going to happen is U.S. of the 21st century.

    • Sean Kennedy says:

      Sasparilla, you’re right several LNG terminals were built and some taken out of mothball recently.
      There are several things that will come together to drive nat gas prices back up:
      1. Investment dollars for drilling will go elsewhere. Listen to any of a number of exploration companies and you’ll see they are going toward oil and wet nat gas plays (EOM, Chesapeak, Apache, Anadarko, etc.)
      2. Any new power plants will use gas. (over coal or nuclear).
      3. Gas will make small inroads in the transportation sector (CNG fleet vehicles and electric vehicles)
      4. The US will begin exporting LNG. Cheneire Energy has applied for the permits to do just this thing.
      Put that all together and we’ll see rising gas prices. This will probably hit at the same time and outpace supply for a while. Anyone remeber the late 90’s? Nat gas was around $1.80 before a slew of gas fired electric plants were built.

      The difference I see this time around is renewables will play the role of spoiler against high prices. When gas touches $15 renewables will economically viable.

      Repeat this price cycle a few times and renewables will play a significant role in power generate and be widely accepted. As we diversify our generation fleet, fossil fuel price swings will less and less impact on our economy.

  8. The problem with shale gas (see especially http://www.global-warming-forecasts.com/underestimates.php and http://www.global-warming-forecasts.com/methane-carbon-dioxide.php ) is that it is a very risky proposition.

    First, in order for hydraulic fracturing of shale gas formations to extort the gas out of rock, you need massive amounts of water. Problematic in a water short future.

    That means that we can expect the same type of mid-air collision that we saw with ethanol (food vs. fuel). There will be a fistfight between those who demand that water supplies be safeguarded for food production and safe drinking-water purposes vs. those who want to draw off large volumes of water for hydraulic fracturing to produce gas. (A problem that is hardly bothersome to clean technologies like wind, PV and energy efficiency). Water is a showstopper for fracking.

    Second, when we approach and shoot past the 2015 IPCC greenhouse gas deadline for stabilizing emissions, there will be a rising trajectory of hammer-swinging policies and mandates implemented to flatten GHG emissions levels. That means there will be greater regulation of gas production which is a high stress source of fugitive methane emissions. Methane (as Kirk Smith reminds us) is carbon dioxide on steroids — 72 times more potent at trapping heat than CO2. Not to mention the regulatory burst that will occur triggered by accelerating permafrost methane outgassing and Arctic ice melt headlines.

    All these forces combine to load higher costs and pose greater risks to those investors who invest in shale gas companies and face the prospect of finding themselves taken by surprise when gas company forecasts collide with the realities of water scarcity, heat waves, hurricanes and hardline regulation.
    Burnet

  9. Marcel Williams says:

    It really doesn’t matter how cheap natural gas is. It’s still a major greenhouse gas polluter that’s raising sea levels and acidifying the oceans. In order to sustain and grow  carbon neutral energy production in the US, the Federal government has to mandate that at least 50% of the electricity produced by a utility in the US has to come from carbon neutral resources by 2020 and 90% by 2030. A heavy energy tax should  be placed on all utilities that fail to meet this criteria. Such a policy provides a powerful incentive for utilities to continue to invest in carbon neutral technologies. 

  10. Raindog says:

    Good article.

    Gas prices will go up because most companies aren’t making a profit at $2.50/mcf. I would say prices need to get back to $5/mcf for many gas plays to be worthwhile.

    Even as gas’s share of electricity production has gone up, renewables are growing faster than ever. This is in large part due to a president that supports renewable energy and is keeping government support high. But many people see this as something that is worth investing in personally and that will also continue.

    One good thing about cheap natural gas is that it has really helped to right the economy. It has provided jobs and helped offset the impact of high-priced oil. Don’t underestimate the importance of a strong economy in making this switch. Spending on renewables is a lot easier when the economy is doing well than when it is doing poorly. When times get tough many people get scared and just lunge for the cheapest thing. Another thing a stronger economy will do is keep Obama in office. Whatever you think about him, he is way better than the alternative in terms of funding for renewables.

  11. CB says:

    Nobody talks about the true cost of fossil fuels. Costs that are not included in the price at the pump but are ultimately paid by the consumers nonetheless. They also get Gov’t incentives including mineral rights to vast tracts of land that they don’t need to purchase and are free to destroy for any future use. Wonder what the longterm cost will be for ruining the water supply in Colorado or removing mountains and filling in stream valleys in West Virginia will be?

  12. Steven Kopits says:

    The reason proved reserves tend to hover around 10 years is that is doesn’t make economic sense to drill for more than that. So drillers stop drilling when they have about ten years’ proven reserves. When that number drops, they go out and drill more.

  13. Keith says:

    The #1 reason should be: Renewable energy (wind/solar)requires natural gas to function. If you were to go off-grid, the first thing to get is a battery bank so it can be charged by a wind turbine or a solar panel. You can’t match your energy use to how fast the wind is blowing or how much the sun is shining. The energy produced by industrial scale wind and solar plants is not stored; therefore, gas generators (or coal) are required to synchronize the variations in output of intermittent forms of renewable energy (wind/solar) to the ups and downs of the grid.

  14. Rolf Westgard says:

    Wind and solar combined are about 1% of our total energy and 3% of electric energy. They are intermittent and trivial and won’t do much even if NG price rises. They are used because of subsidies and mandates.

  15. IndependentTexan says:

    Rolf – that’s just propoganda – where’d you get the coolaid you’ve been drinking? According to the U.S. Government renewables make up 8% – see it here: http://www.eia.gov/totalenergy/