For years natural gas has been likened to a “bridge fuel,” a source of electricity generation that can tide us over until renewables are ready to carry the full load. When it is burned natural gas emits about half of the CO2 as coal, making it a preferred alternative to coal, which has long dominated U.S. power generation.
Environmentalists have criticized natural gas because although it is cleaner than coal, it still is a fossil fuel that emits greenhouse gases. Methane is also released during production and transmission, a particularly potent greenhouse gas. Moreover, the idea of a “bridge fuel” is a not as neat as is often claimed, environmentalists argue, because investing billions of dollars into long-lived assets – pipelines, power plants, processing facilities – will leave us locked into that infrastructure for decades.
Nevertheless, the coal-to-gas switch got underway, largely due to incredibly low natural gas prices after a boom in shale gas production. The switch allowed U.S. CO2 emissions to fall over the past decade or so.
However, now a funny thing is starting to happen. The opportunity for natural gas is starting to run out.
That conclusion comes from the IEA’s latest Medium-Term Gas Market Report, which projects the construction of natural gas-fired power plants to stall, upending conventional wisdom about the future of U.S. electricity markets. In a forecast for the period between 2015 and 2021, the IEA sees gas consumption almost unchanged over that time frame. “The projected stagnation in gas-fired power generation is the most striking difference relative to the trend of the previous six years, when gas consumption in the sector increased by 90 bcm.”
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There are several reasons for this. First, overall electricity demand is flat and won’t grow. Consumers have all the electronics they need, and if anything, appliances and housing are becoming more energy efficient.
But what about all those coal plants expected to be forced offline? Won’t gas be needed to replace them? Indeed, the IEA sees about 45 gigawatts of coal knocked offline through 2021, following a massive 15 GW of coal retirements in 2015.
However, instead of natural gas replacing coal, renewables are already starting to capture most of the new market demand. In 2016, the U.S. could add 26 GW of new electricity capacity, but gas will only make up 8 of those GW. The rest will come from solar and wind. The extension of solar and wind subsidies through the end of the decade as part of an 11th hour budget deal in 2015 will ensure renewables continue to make up most of the new additions. Related: India Putting Floor Beneath Oil Prices As Demand Continues To Soar
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The good news for natural gas is that as excess coal plants retire, gas plants won’t be as sensitive to price fluctuations. In other words, if natural gas prices rise, there will be fewer coal plants around to force gas plants to throttle back on generation.
But, with renewables increasingly filling the void left over by shuttered coal-fired power plants, the IEA sees that the huge upside potential for natural gas because of the death of coal is actually close to being exhausted. Natural gas has already picked all of that low hanging fruit. From here on out renewables will eat coal’s lunch, not gas. The IEA concludes that these dynamics will leave “gas-fired generation in 2021 at a level broadly similar to that of 2015.”
The only way for this forecast to be wrong is if natural gas prices remain incredibly low, low enough to compete against both coal and renewables. But that could be too much to hope for. Low natural gas prices have actually killed off the shale boom itself. Related: Shell Unveils New Strategy: ‘Leaner and Deeper’
Although gas production is still very high, it has started to fall in several key places, most notably the Marcellus shale. Low prices lead to drilling cut backs, which in turn force production to stop climbing. The end result will have to be higher natural gas prices. Indeed, that is already underway. Henry Hub spot prices have jumped to $2.60 per million Btu (MMBtu), up from sub-$2/MMBtu seen just a few weeks ago.
Looking forward, the IEA argues that the decline in natural gas production will be temporary. Oil prices will rebound, which will provide a lift to revenues for associated gas and natural gas liquids, improving the margins for drillers. Also, just as with oil drilling, companies have managed to cut costs from suppliers. But capital costs are higher, as lenders are smarting from the bust over the past two years.
Overall, the IEA expects production to pick back up after 2017 when the market starts to balance. But the Paris-based energy agency sees natural gas prices averaging $3.50 to $4/MMBtu through the end of the decade.
Those kinds of prices will make it difficult for natural gas to make much larger inroads into the electricity market, as renewables will increasingly be the preferred choice to shuttered coal plants.
By Nick Cunningham of Oilprice.com
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