Natural Gas is Cleaner, Cheaper, Easier and Riskier

There is much to like in the growth of natural gas as the marginal fuel of choice for power generation.  Clean, cheap, easier to site, quicker to build, fewer regulatory or environmental hassles—-and it cuts emissions 40% compared to coal.

A new study by Professor Lawrence M. Cathles, Cornell University, recently published in the journal Geochemistry, Geophysics and Geosystems calls natural gas a transition step to a low-carbon energy future of wind, solar and nuclear energy.  He says hydraulic fracturing is driving down the price of natural gas and the risks from fracking are well worth the benefits.

On the surface Professor Cathles’ conclusions seem tough to argue with.  What’s not to like about a forty percent reduction in greenhouse gas emissions at low natural gas prices.

But I’m not as sure we should blindly sign up for either the professor’s transition to a wind, solar and nuclear future.  Nor am I convinced that it makes sense to project the current low natural gas price conditions forward.  We’ve seen this movie before.  Are we so enthralled with natural gas prices below $3 that we forgot that they were above $13 not that long ago.  Anyone trying to manage a power generation portfolio will tell you that one of the great uncertainties in trying to forecast natural gas prices—one of the world’s most volatile-priced commodities.

Today, horizontal drilling and hydraulic fracturing have unlocked the natural gas resources previously uneconomic from the shales across North America.  The result is historic low prices, historic high supply levels with America trying to do the same thing in natural gas  that China has done skillfully in solar photovoltaic panels and wind turbines—boost exports and bring home the bacon!  I doubt America’s natural gas exports will ever rival China’s export prowess, but the lure of high LNG prices in Asia and elsewhere is enough to worry Russia, Qatar and other gas exporting nations.

Depending upon nuclear power for a clean energy future is also a movie we have seen before.  The same looming threat of high interest rates, higher inflation, regulatory uncertainty and long tortured approval, permitting, and construction cycles killed off the last wave of proposed nukes.  Low natural gas prices even in the absence of these other risks is successfully undermining the future of the next generation of nukes as well.

Wind and solar have been the regulatory and political favorites of the past decade and both have made tremendous progress.  In 2005, at Global Energy Decisions we published Renewable Energy: The Bottom Line to support our conclusions that wind first and later solar would become mainstream resources and we were willing to give independent market opinions on renewable energy projects when the numbers penciled out.  This study was important in its time adding credibility to a fledgling industry that has serious bankability problems. But despite their success, these renewable resources are a small share of the total installed power generation capacity and their intermittency make it difficult for them to displace coal or natural gas.  Having a large fleet of baseload nuclear energy with supplemental renewables is a good combination but it has a low probability of success.

That brings me back to the central question of whether gas is too risky.  Today we have an abundant supply of natural gas and the prospects of more from the domestic energy growth of shales.  But what would happen is the US EPA slaps onerous regulations on hydraulic fracturing which limits the growth potential of horizontal drilling?  Our $3 natural gas price could quickly turn back into the $13 natural gas prices we experienced less than a decade ago when we thought it would be necessary to import LNG to make up for the domestic natural gas shortfall from conventional drilling.

What would happen is, in the absence of building new nuclear power plants, we begin to experience the double whammy loss not only of the existing coal fired generation but the retirement of the existing nuclear fleet?  The tube corrosion problems at California’s two nuclear power plants is amble evidence that surprises can happen.  There is no way wind and solar can make up for the loss of both coal and nuclear baseload.  We can build plenty of gas fired combined cycle generation and gas peakers but the price of natural gas will certainly go up and become more seasonably and regionally volatile.

The fallacy in professor Cathles’ logic is that without new nuclear power generation there is NO transition plan.

Depending upon natural gas to carry the day in a transition period while other baseload resources slowly exit the fleet as they are replaced with new resources is one thing.   But relying upon natural gas to carry the weight of baseload generation from both coal and nuclear priced or regulated out of the market, carry the weight of load following resources in a (hopefully) recovering economy as demand grows and regional reserve margins shrink, and count of natural gas to back up all that renewable energy from wind and solar is asking for ugly price volatility surprises and market instability.

The market ‘transition’ we are more likely to see is dramatically higher utility rates and less grid reliability.  The reason is we are soon to face the cumulative cost of policy biases in favor of renewable energy, a smarter grid, reduced greenhouse gas emissions and the shift to power generation of the emissions burdens of transport to trump a ‘least cost, best fit’ strategy of assuring grid reliability.  We’re going to need all the low natural gas prices we can get to help offset the cumulative cost of our industrial policy changes, but it is not going to be enough to prevent rates from going up—way up.