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Natural Gas Is Already Losing To Renewables

Natural Gas Storage

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.”

Related:

 

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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

 

(Click to enlarge)

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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  • RussianJew on June 09 2016 said:
    Every time I am going to Palm Springs I am passing those wind mills right after Morongo casino on freeway 10. There are hundreds of wind mills and I never saw more than half of them operating. Instead of keep talking about a great future of wind power why don't you release how much energy that wind power field is producing, its repair expenses and the cost of kWh produced? I am sure those numbers are scary. That's why renewable cheer-leaders are always talking about their projections - and never about results.
  • Jim Decker on June 09 2016 said:
    Of course, this presumes that we will continue to subsidize incredibly expensive renewable energy when it gets more and more painful as it grows in market share. When CA goes bankrupt from their foolish ways including solar subsidies, this whole nonsense collapses.
  • Praedor on June 10 2016 said:
    I'll take issue with a bit of a nit in the article. You say that natural gas is cleaner than coal...only when burned. It is NOT cleaner overall because you have to count the HUGE volumes of gas that leaks into the atmosphere at the point of extraction through delivery and at the end-point BEFORE burning. Methane is a MUCH stronger greenhouse gas than CO2 so you can argue that natural gas is not actually cleaner than coal, all told.
  • Adrian on June 10 2016 said:
    Jim Decker - a funny thing happened on the way to today, costs came down. A lot. Wind is no longer "incredibly expensive." PPA's in the Great Plains are being signed < $0.02/kWh, and that's still around $0.035/kWh once the PTC is backed out. That's getting competitive with just buying gas, without paying for the powerplant to burn it in or the infrastructure to deliver it. As rotor hub heights keep increasing, capacity factors are increasing too. In the 1st quarter, wind had an average capacity factor greater than gas and close to coal nationally.

    The best utility-scale solar PPA's are coming in around 4 cents, but that continues to come down fast, with something like a 25% drop in reported PPA prices last year.

    Gas will have a role to firm renewable intermittency for a while. Watch storage prices carefully though...
  • Anonymous on June 10 2016 said:
    The IEA is about as credible as the United Nations...... They have an agenda to push.

    Renewables are environmental polluters.... The materials, such as rare earths for windmill magnets, come from Chinese mines that do much more damage that methane leakage.

    Renewables destabilize the electric grid. There is a hard cap on how much intermittent generation can be put into service without a electricity storage solution that is still theoretical at this point.

    Renewables (as Jim points out) are incredibly expensive and are totally dependent on additional subsidies for growth. Look at electricity prices in Germany due to their over commitment to renewables.
    __________________________

    If you believe in global warming the only proven technology we have available is nuclear. Low pressure systems, most notably Liquid Fluoride Thorium Reactors [LFTR], were run successfully at Oak Ridge back in the 60's. Not only are these carbon free they can begin burning the back log of "spent fuel" that is being stored at the existing fleet of high pressure nuclear reactors.
  • Adrian on June 10 2016 said:
    Anonymous said, "Renewables destabilize the electric grid. There is a hard cap on how much intermittent generation can be put into service without a electricity storage solution that is still theoretical at this point."

    Portugal's grid ran on 100% renewables for 4 days straight earlier this year, and they don't have large interlinks to neighboring countries. Nothing broke, and nobody's factory went dark.

    http://cleantechnica.com/2016/05/21/100-renewable-electricity-portugal-4-days/
  • Biff Concurs on June 11 2016 said:
    Portugal, the industrial powerhouse, the driver of the entire world's economy? How impressive!

    And for 4 whole days! Tiny Portugal is enormously dependent upon Tw level connections to Spain, and could not have sustained its grid even those 4 days without it. You are looking at very sketchy accounting practices to even make the claim to begin with, from a renewable advocacy group in Portugal, no less.

    Repeating a big lie endlessly does not make it true, whether the broadcasters are government agencies, vested academics, green journalists, or environmental lobby groups.

    Nick Cunningham has gone out on a limb and his credibility is dangling by a thread, because of this type of article. OilPrice.com is supposed to be more credible on energy issues than rags such as cleantechnica and business insider. It's not worth your name, Nick, no matter what the editors or publishers are pushing as the story du jour.
  • Lee James on June 11 2016 said:
    U.S. utility companies have spoken. Today over half of new electric power generation comes from renewable energy.

    The developing world is speaking. Ditch the fossil fuel central generation model; do it cell phone style, with distributed, local renewable energy.

    For a variety of reasons, including health and national security, we need to transition away from burning hydrocarbon.
  • Chad Koury on June 11 2016 said:
    Wait until the subsidies run out. The only reason that renewable are generating so much energy is because the increased infrastructure is being paid for by the federal government. These sources of energy are decades away from being efficient, much less carbon negative.

    Do you know the environmental impact of constructing a wind farm?!?!

    Do you know the environmental impact of procuring rare earth minerals for solar panels?!?!

    The free market will always find a way to focus time, money, energy, effort, etc. on the task at hand. When hydrocarbons become too expensive to use, research of renewables will become economically viable. Until then: DRILL BABY DRILL
  • AstroArtie on June 28 2016 said:
    Anonymous said, "Renewables destabilize the electric grid.
    In actuality \, the people managing the power grid like renewables because they stabilize the grid: Current power plants are monolithic and they takes time and money to throttle up and down. Renewables are much more nimble. If a windturbine trips, it doesn't take out a fifth of a states power - coal and nuclear plants DO trip! To compensate for a fossil fuel plants inertia, you engage peakers, which are nimble gas turbines that are pretty expensive to run. The combination of wind and solar actually follows general demand pretty well - whereas fossil fuel plants are most efficient when kept at constant production.

    Chad Koury said: "he only reason that renewable are generating so much energy is because the increased infrastructure is being paid for by the federal government."
    This is wrong in a couple of ways.
    First: Adrian quoted his numbers above, after the government subsidies had been backed out.
    Second: Subsidies do not change how much energy already installed renewable capacity produces. Remember - you don't have to fuel a windturbine. The cost of electricity from renewables is determined at the time of building and by the lifetime of the installation. This also means stable energy markets where you can count on the cost of energy, on a several year time-scale. No need to worry about instability in the Middle East...
  • O. Lewis on June 28 2016 said:
    The author wrote "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."
    That's wrong on so many levels I barely know where to begin. Okay, to give him a little credit I'm sure electronics and houses are becoming more energy efficient. However, it's been shown in multiple studies that as efficiency improves people actually use more energy not less. We don't suddenly not use the energy saved by increased efficiency, in fact we do go out and buy more electronics, a bigger house/vehicle, etc. Saying that 'consumers have all the electronics they need'; implies that suddenly capitalism is going to stop. Advertisers should obviously just pack up and shut down their businesses, because the American public has "all the electronics they need."
    He's also ignoring something like the rise of electric vehicles. If they catch on even half as fast as some predictions I've seen, it's going to lead to a massive increase in the amount of electricity required. Then there's the internet of things which is coming down the pipes pretty fast. Increasingly more electronics, even efficient ones, is going to increase energy use. Massively. Period.

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