How We 'Fracked' the Energy Industry—-for the Good!

EIA US Dry Gas Production

SOURCE: US EIA
The energy industry is being turned on its head by changes in technology, regulation and global markets. In oil and gas the shale revolution onshore was unleashed by technology changes in 3D seismic imaging making E&P more accurate and productive, horizontal drilling enabling access to the ribbon-like shale and tight oil formations, and hydraulic fracturing which uses liquids and pressure to crack open or ‘frack’ the shale layers to release its precious commodity.

Fracking is a much maligned term today by opponents of fossil fuels who turned it into an expletive to profane what they do not like. Since global markets work on supply and demand economics and do not care ‘one fracking bit’ what opponents of fossil fuels like—the shale revolution is growing—transforming the entire energy world.

In the power sector these same forces are ‘fracking’ the traditional utility business model and the regulatory compact on which it was built. Wind and solar renewable energy’s popularity encouraged subsidies and tax credits to stimulate market share growth and bring down their high capital costs. Renewable portfolio standards adopted by 30 states mandated utilities purchase fixed percentages of renewable energy creating a restricted auction market among renewable projects. Lower cost non-wind or solar energy projects need not apply.

Because renewable projects cost more than the average system cost utility rates went up. Because renewables were intermittent and needed back up energy to assure reliability utilities had to procure sometimes 2X their renewable need to meet their target for supply from renewables—or buy gas fired backup energy. This increased rates. Then net metering laws designed to encourage rooftop solar paid us to sell our solar energy back to the utility at the avoided cost—what it would cost the utility to buy it elsewhere. Where is elsewhere?

Elsewhere is almost always natural gas fired power generation purchased from the grid. Great you say, natural gas is cheap —that’s good. Yes it is, but low priced natural gas is a competitor to every other power generation source including renewable energy. Low gas prices are a product of the abundant supply of natural gas from the shale revolution at work in the United States.

This completes the circle. Those who love renewable energy because it is clean face the realities that it often still costs more and is intermittent. Solving those problems requires better technologies to increase efficiency, more competition to drive down prices, and enough base load generation which is either coal (No to coal, you say?) or nuclear (more no, no, no) then your only option is load-following natural gas-fired power (it’s still ‘fracking’ fossil fuel, yes but 50% cleaner than coal and low priced—until the battery storage learning curve improves to equal or beat gas prices.)

It was not always this way. Less than a decade ago we worried we were running out of gas and worried we would be forced to import it as LNG from some of the same countries we got our oil from—at higher prices to match our higher demand. Then the shale revolution with disruptive technologies like horizontal drilling and fracking changed everything—for good. Today we have abundant supplies of domestic oil and gas, but we face very different problems as these forces at work in technology, policy and global markets turn our energy infrastructure and economics on their heads.

The ‘fracking’ truth is global market competition, disruptive technology change and innovation re-imagining business models for the global market competition ahead are leveling the playing field for good. Just as fracking replaced outdated drilling technologies, Uber is displacing Yellow Cab, AirBnB is challenging hotels updating outdated business models.  Utility business models were built to protect monopoly markets in exchange for socialized averaged prices, but going off the grid to be a Net Zero Energy Building, or a net-metered solar home sweeps aside old market rules and will just as ruthlessly sweep aside politically correct new market rules and regulations that get in the way of finding market equilibrium that works without subsidies, mandates and politically correct industrial policy du jour—-and politicians with their hands out who bring them.

Competition is ‘fracking’ good for US individually and as a nation.