“The answer, my friend, is blowing in the wind”
—From “Blowing in the Wind” by Bob Dylan
Yes, cheap natural gas will hurt the rate of growth of renewable energy. There is no way to sugarcoat this unfortunate outcome. But much can be done to ameliorate the effect, and most of that lies in the policy arena.
Ironically, the celebrated successes of NGOs, primarily the Sierra Club, in shutting down coal plants and halting the building of new ones may hurt the cause of renewable energy. In the time frame required, in many instances wind and solar options will not meet base load grid parity. This is generally defined as parity with the cost of base load electricity production in that area. So, absent strict policy measures, which will be very hard to come by, natural gas will be the fuel of choice. Natural gas plants will not simply be mothballed when wind power reaches economic parity. The early demise of coal plants will lead to natural gas-fueled electric power plants with greater installed capacity.
In recognition of this, the Sierra Club had initially taken a position of natural gas as a bridge fuel until renewable sources became more economically viable. Hand-in-hand was the insistence on environmentally responsible production. In early 2012, Sierra Club executive director Michael Brune seemingly reversed that position, citing the environmental risks posed by shale gas production. He said, “As we phase out coal, we need to leapfrog over gas whenever possible in favor of truly clean energy” (Brune, 2012). While the “whenever possible” phrasing leaves some wiggle room, this is a definite movement away from the Club’s original position.
In the view of this author, a life member of the Sierra Club, the solution is the responsible production of shale gas as bridge fuel. Clean coal is not an oxymoron, but it is expensive. At the same time, the move to renewable energy must be accelerated. In another odd twist, natural gas may be needed at first as
124 Part IV. Informing on Policy
a load leveler, even for wind and solar production, due to their diurnal cycles. Someday we hope to develop effective storage mechanisms. But someday can be a while, and we must be realistic regarding the need for bridging mechanisms. The 2012 Department of Energy budget includes funding for an Energy Innovation Hub researching energy storage. This is good policy.
The price of natural gas in North America is roughly one-fourth that of $100-a-barrel oil on the basis of energy content. For this computation, I consider a more normal $4 per MMBTU, not the $2.50 in March 2012. In Europe the price is higher but still a factor of 2 to 3 cheaper than oil. The discussion of whether renewables will be hurt falls in two distinct realms: electricity generation and transport fuel production. Accordingly, I consider these separately because the impacts will be distinctively different.
But first, let us examine the very premise of cheap natural gas. Until the shale gale swept us up, natural gas prices fluctuated considerably. For the last 13 years, the Henry Hub price was as low as $2 per MMBTU and as high as $13 (Figure 12). The Henry Hub price is the price of gas in Erath, Louisiana, and is used as the price for trading on the New York Mercantile Exchange. It is a rough proxy for US natural gas price.
Figure 12. The Henry Hub price per million BTUs, 1999–2012
Source: US Energy Information Administration, May 9, 2012
Jan 99 Sep 99 May 00 Jan 01 Sep 01 May 02 Jan 03 Sep 03 May 04 Jan 05 Sep 05 ay 06M Jan 07 Sep 07 May 08 Jan 09 Sep 09 May 10 Jan 11 Sep 11 May 12 Jan 13 Sep 13
16 14 12 10 8 6 4 2 0 Dollars
The inherent uncertainty in gas price caused coal and nuclear to remain as viable options for electricity generation. Entire chemical industries moved abroad to regions of predictably cheap gas.
Gas from shale at first was costly. After the kinks got worked out and further advances were made, it could be produced profitably at costs lower than many conventional gas operations. Meanwhile, the sheer volume kept the price down. At the prices today the most profitable operations are those with higher proportions of natural gas liquids in association, because the value of this component is pegged to the price of oil and benefits from the high price of oil. The dry portion of the gas therefore continues to be produced, even at low prices.
Inevitably, consistently low prices will create demand and eventually prices will rise. In the face of this I offer the view that shale gas production will keep gas prices moderate. This is largely due to shale gas wells being on land and shallow by industry standards. These wells can be in production in 30 to 60 days after commencement. This short duration effectively keeps a lid on the price. If the three-month strip (the commodity price three months into the future) is seen as going up, new wells can be in production well within three months. This sort of certitude will also discourage speculative investment in the commodity.