Low Gas Prices Rattle Renewables

SOURCE: American Gas Association

In “Economic and Employment Contributions of Shale Gas in the United States” IHS Global Insight says shale gas production is producing significant benefits for the U.S. economy from lower natural gas prices, significant growth in direct and indirect jobs and substantial tax revenue.

The impact of the growth of unconventional gas is staggering.

  • In 2011, unconventional gas market share reached 34 percent of all U.S. natural gas production. By 2035 it is expected to be 60 percent of all U.S. natural gas production. Better yet, the full-cycle cost of unconventional gas wells was up to 50 percent lower than the cost of natural gas from conventional wells.
  • In 2010 unconventional gas was responsible for 600,000 jobs but is expected to grow to 870,000 by 2015 and 1.6 million in 2035. The cumulative impact of this growth in unconventional natural gas is expected to generate more than $1.9 trillion in capital investments into the economy delivering more than $933 billion in tax and federal royalty payments over the next 25 years.
  • Lower domestic natural gas prices will save a typical US household $926 per year in between 2012 and 2015. Better yet, those savings from continued lower projected natural gas prices will grow to more than $2,000 per household by 2035.

These same low gas prices also benefit utilities producing an expected 10 percent reduction in generation fuel costs nationally, over the period to 2035. Even better, low natural gas prices will encourage more industrial growth across North America. Global Insight says industrial production will increase by 2.9 percent by 2017 and 4.7 percent, by 2035 helping rejuvenate America’s domestic manufacturing base.  The fastest growing segment of natural gas growth is fuel demand for power generation. Low gas prices keep customers happy and enable utilities to focus on other priorities.

There is good news and bad news about the impacts of unconventional natural gas on renewable energy and the clean energy future.  Low gas prices are ruthlessly efficient at undermining the economics of coal and nuclear baseload generation.  In fact, low gas prices are likely to have as profound an effect in reducing coal’s market share as the onerous EPA regulations proposed.  IHS CERA has forecast that as much as 36 GW of coal fired generation will be retired over the next ten years as a result of the combination of low gas prices and EPA regulations.  This is a lower estimate than others have offered but still a significant reduction in coal market share.

But low gas prices also pressure renewable energy in several ways.

  1. Grid Parity Price is Going Lower. The very definition of grid parity against which renewable energy is measured is the price of natural gas fired combined cycle generation.  So lower gas prices also increase the gap between above market renewable energy costs and grid parity.
  2. Low Renewable Efficiency versus High Gas Efficiency. All renewable energy requires back up from natural gas because of its intermittent nature.  So there is an increasing performance challenge facing renewables.  If your project requires backup from natural gas but if gas is cheaper, more flexible, has an efficiency rating of 65% compared to a solar efficiency of 20% and a wind efficiency of 35% and gas is fully dispatchable why not just build more gas once you reach your mandated renewable portfolio standard targets.
  3. Subsidy Fatigue.  The expiration of the Section 1603 treasury tax grants and the diminishing enthusiasm for additional tax subsidies puts tremendous pressure on renewable energy especially solar whose production tax credit authorization expires at the end of 2012 compared to wind production tax credits that extend to 2016.
  4. Losing the Technology Edge The business strategy of renewable energy has been to rely upon renewable portfolio standards across the states to create mandatory demand, depend upon Federal tax credits and subsidies to improve bankability reduce the cost gap, and increasingly to substitute cheap solar PV panels and wind turbines from China for more efficient newer technologies. The consequence of this survival strategy is that it leaves renewable energy weaker and more dependent upon the oldest, least efficient solar and wind technology.  Meanwhile natural gas power plant builders GE and Siemens have invested in improving the efficiency of gas combined cycle to about 65%. This is a huge gap for renewable energy to close given the average ~ 15% solar efficiency and ~ 35% efficiency for wind.  This is not the place American renewables companies want to be in a global competitive market nearing the achievement of state RPS targets.

The bottom line is low natural gas prices complicate the competitive market strategy of renewable energy.  While low gas prices hurt coal and nuclear badly they also bring down the grid parity price to beat for renewable energy.  To win long term renewable energy must refocus on improving its technology and efficiency to break the cycle of dependence on the oldest PV and wind turbine technology with the lowest efficiency ratings.  The clean energy future depends upon the best technology not the oldest and least efficiency.

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