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
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
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
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.