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Feb 16, 2012

Natural Gas Boom Won’t Stall U.S. Renewables


The recent plummet of the natural gas spot price to a 28-month low has stirred discussion about implications for renewable energy—the majority electrical generating component in RMI’s vision of the 2050 U.S. energy economy.

Since mid-2009, it has been increasingly clear that the amount of natural gas supplied via hydraulic fracturing (popularly known as “fracking”) will create an oversupplied domestic natural gas market. The resulting low gas prices depress contract pricing for long-term power sales to utilities. This situation poses significant challenges for new, utility-scale renewable power projects, which must secure contracts with attractive fixed prices to obtain financing.

Yet, while fracking to unlock America’s shale gas reserves poses a near-term threat to the rate of utility-scale renewable energy development, it offers significantly lower risk to growth of domestic renewable energy just a few years out.

That’s in part because natural gas faces significant upward pricing pressure. Increased regulation, long-term underperformance of production wells, and higher-priced drilling leases all should push prices up on the supply side. On the demand side, increased use of compressed natural gas in vehicles, exporting of liquefied natural gas, and, most significantly, increased natural gas demand for electrical generation, replacing coal, also should elevate prices.

Even against the current natural gas futures pricing curve—much lower than just a few months ago—utility-scale renewables can compete unsubsidized within a few years. In good wind locations, wind power can already compete unsubsidized with natural gas selling for more than $6 per million BTU. According to Bloomberg New Energy Finance, wind turbine pricing has averaged 14 percent per-year declines since the mid-1980s. If that continues, by 2016 wind power should compete head-on in a growing number of locations with wholesale natural gas, which by then is expected to sell above the mid-$4s per million BTU.

Continued Year-Over-Year Growth

Even in the short term, while low natural gas prices will likely slow the deployment of renewable energy capacity, they may not stop absolute year-over-year growth.

First, in 2012 special financing circumstances will keep work going and capital flowing. Many project developers invested the necessary 5 percent minimum of total project costs prior to Dec. 31, 2011, qualifying these projects to receive a 30 percent Treasury grant. Many of these projects also signed power purchase agreements with utilities at attractive prices before the current dip in natural gas pricing. In addition, 50 percent bonus accelerated depreciation is available.

Solar PV Boom

A boom is projected to accelerate in distributed solar photovoltaic (PV) development, which is less affected by low natural gas prices. While utility-scale renewable generation must compete against wholesale prices, distributed renewable installations such as solar panels on a factory roof compete against retail power rates. Those projects generate electricity used on site and reduce that business's bill at the higher retail rates, which on a national average continue to rise despite falling wholesale prices.

While the retail rates are rising, solar PV development costs are rapidly decreasing. By the beginning of 2013, crystalline (industry “standard”) solar module costs are predicted by energy analysts to reach 70 cents/watt, dropping total cost of commercial installations to approximately $2.70/W and residential installations to about $3.60/W, based on Department of Energy SunShot data. These whole-system installation prices represent reductions of more than 50 percent from as recently as 2007.

Grid parity, the point at which renewables are price competitive with the existing grid, primarily based on coal- and gas-fired electricity generation, has already begun, with average retail prices in Hawaii above those levels, as are top retail prices in other states, such as California. While Hawaii and California feature some of the most expensive retail rates in the U.S., the fact that they have attained grid parity for many retail ratepayers indicates more areas will reach the grid parity tipping
point with each penny drop in the price of solar PV

The Takeaway

Cheap natural gas presents a challenge to utility-scale renewable power growth over the next couple of years, but increased distributed solar PV deployment may bridge the gap. RMI is working with utilities, public service commissions, financiers, and others empowered to enable PV deployment to exploit and accelerate this near-term opportunity. Long term, the relentless cost curve of both utility-scale wind and solar PV—as well as natural gas’s and coal’s environmental and market dynamic factors—will inevitably lead to accelerated build-out of renewable power.


Showing 1-6 of 6 comments

February 16, 2012

Thanks for the update Dan. There was a recent webinar hosted by Ohio State University on January 31, 2012 (Link here: http://changingclimate.osu.edu/webinars/archives/) that raised a few points about the recent low prices of natural gas. Thanks for connecting the dots here for the rest of us.

February 22, 2012

With the current policies put in place by our local rural cooperative, LPEA, renewables will never become competitive. LPEA has just raised the base rate, not the kWh rate, and has committed to continuing to raise only the base rate for at least the next 10 years. Count yourself as lucky if you live in an area where there is support for renewable energy.

February 22, 2012

I understand the argument here in favor of renewables. I agree that natural gas will not necessarily be the cheapest option because of its increased availability. However, if the US is going to continue on a path of natural gas exploration, it would make the most sense to utilize it in the most efficient way possible. Fuel cells are an ideal use for natural gas as they provide the cleanest use of natural gas in any application and with the smallest footprint of any technology.

The abundance of natural gas in the United States is a resource that should be used intelligently. Through a hydrogen extraction process, Solid Oxide Fuel Cells are able to process natural gas at 40-60% efficiency when compared to normal combustion avenues. This flexible technology for natural gas will increase productivity and broaden the scope of the transportation, residential, commercial and industrial sectors.

President Obama ascribes to an "all of the above" energy outlook. To this end, fuel cells will, likely, play a dynamic role in America's diverse energy portfolio going forward.

February 23, 2012

You say a boom in natural gas production via "fracking" technology will not supplant growth in renewable energy. My question is: Is this why natural gas prices seem to stay very low, near bankruptcy levels in some sectors? Or am I just being paranoid? Whereas, the oil companies certainly are booming regardless whatever else happens in the economy, and their economic boom remains a real blight on the planet and alternative energy development. Well, I don't like fracking if it uses deadly chemicals or anything dangerous, but I think natural gas can be produced not just from underground deposits but also from various biological sources as methane, and it should be used to some extent. Thank you.

February 23, 2012

Discussion doesn't make the oil and gas companies (who are waiting hungrily to drill-baby-drill the Niobrara Play beneath Boulder County) go away. It appears that low natural gas prices aren't affecting their huge appetite for profits as they continue to embrace the term, "bridge fuel" to the maximum degree - "local energy & jobs" - oh boy - and then sell to China or the highest bidder. These companies are about rape and pillage - they plunder and leave the devastation behind. Please take a look at our web site, longmontroar.org and assure us that we're not going to get drilled.

February 25, 2012

I have questions related to natural gas as it is used for space and water heating and in industrial processes. These questions are about the impact on NG prices that would come about as the result of a) the potential to reduce natural gas use through efficiency measures (e.g., weatherization) and renewables (e.g., solar hot water, ground and air source heat pumps), and b) supply side pressures (which your article touches on briefly).

For background: McKinsey's 2009 study of efficiency opportunities in the US estimates that upwards of 3.1 TCF of NG use could be reduced annually by 2020, all through economically justifiable measures. In addition, NREL estimated that solar hot water could save 0.4 TCF. (I haven't found an estimate for heat pumps . . .maybe an additional 0.4 TCF? More? Nor have I seen a study that looks at how much renewables would offset the efficiency savings -- have you seen any such studies on either?).

My main questions:
1) In all the discussions about natural gas - the focus by advocacy groups, the press, and various think tanks seems to be focused exclusively on the supply side, i.e. fracking. I haven't seen anything on the ability of demand side measures to offset some or all of the increased demand for NG (i.e, in the near-term, to replace coal). Do you have some idea as to why demand side discussions seem to be completely off the radar?

2) Has RMI done some calculations on how many TCFs of NG could be saved at CURRENT NG prices, using economically justifiable measures? McKinsey's report uses EIA’s AEO 2008 for its NG prices, which average 25% higher per year than the preliminary AEO 2012’s NG prices for 2010-2015, 18% higher for 2016-2020, and 9% higher for 2021-2030.) Would an update of McKnsey’s NG savings potential be proportionally lower, or perhaps much lower if such lower prices (if they prove accurate as the years go by) extend the payback period of efficiency and renewable investments beyond their useful life?

3) To what extent would exploiting all the economically justifiable reductions in NG use further lower NG prices (by lowering demand), and thus by how much would such exploitation perhaps make it more difficult – and perhaps difficult for a longer period of time – for solar, wind, and other renewables in the electric power sector to be price competitive with NG in that sector? Put differently, does the need for renewables to be price competitive with natural gas for electricity generating purposes create a perverse incentive for climate change mitigation advocates to ignore – at best – or oppose – at worst – opportunities to pursue policies and programs that would reduce natural gas use outside the electric power sector?

4) You wrote: "Increased regulation, long-term underperformance of production wells, and higher-priced drilling leases [would force upward pressure on NG prices]." Can you point to any studies that seek to estimate how much NG prices would go up as a result of any or all three of these factors? I’m particularly interested in the regulatory factor, especially in water quality protection, and also fugitive methane capture measures to reduce or eliminate flaring.

Thank you for whatever time you have to provide responses to these questions. I know they are many and they are complicated. :) I would be glad to work with RMI to explore these issues together.

RMI Alum - 2006-2007

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