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Vanand Meliksetian

Vanand Meliksetian

Vanand Meliksetian is an energy and utilities consultant who has worked with several major international energy companies. He has an LL.M. from VU Amsterdam University…

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Natural Gas Could Be Replaced Within 15 Years

Technological improvements in hydraulic fracking are making ‘America Great Again’ when it comes to its energy sector. Unconventional oil and gas reserves, which previously were deemed as ‘uneconomic to produce’, are being exploited on a massive scale.

Consequentially, the shale revolution has altered the international energy landscape, which has enabled cooperation between rivals Russia and Saudi Arabia within the OPEC+ framework. Furthermore, the flooding of the market with cheap natural gas is strengthening the fuel’s competitive position and replacing coal in the power generation market.

Also, innovations in renewable energy technologies are advancing at a rapid pace. Although wind and solar power have been around for some time, it wasn’t until prices dropped significantly during the past decade that installations skyrocketed across the world.

The share of renewables in the U.S. in the overall power production differs from state to state. While gas has become the primary source of electricity production, technological advancements are about to make fossil fuels more expensive and therefore uneconomic compared to renewables. The tipping point could come much sooner than certain utilities and investors are expecting, which could hit current investment plans for gas-fired power plants. 

Innovations and cost reductions

In the 19th century, the growing consumption of coal was made possible by relative abundance and low production costs in the heartland of the industrial revolution. After the UK’s ancient forests were destroyed by the expanding human population, coal was the most straightforward alternative to power the steam engine and other innovations.

King Coal’s replacement, however, is largely made possible by technological improvements in drilling techniques with cheap energy as a consequence. While twenty years ago only twenty percent of the U.S.’ power production was met by natural gas, currently it stands at thirty-five percent while the overall energy consumption has also increased. Related: Home Energy Storage Capacity Breaks Records In US

Technical improvements and costs reductions are having a similar effect on the substitution of natural gas by renewables as the primary source of power production. Cheaper batteries and innovative new ideas regarding the flexibility of the grid are accelerating the transformation towards an environmentally friendly energy industry. Therefore, according to a report from the Rocky Mountain Institute investments in gas-fired power plants could devalue significantly by the year 2035 as power production by alternative means becomes more relevant.

Sound investments based on long-term predictions

The transformation of the U.S.’ power sector is coming much sooner than incumbent producers were expecting. Currently, the combination of solar, wind, storage, and demand response are already more efficient, and therefore cheaper, than the use of fossil fuels.

Source: Rocky Mountain Institute

This should have a profound impact on investments plans. However, there is an estimated $90 billion reserved for new gas-fired power plants in the coming years until 2035. According to the report from the Rocky Mountain Institute, U.S. consumer could save $29 billion if renewables and additional technologies such as storage and demand response replace the proposed gas plants. Related: Where Is The World's Safest Source Of Oil?

The changing economics of power production will also affect subsidiary businesses such as the pipeline sector where $30 billion in pipelines are planned. It would impact 95 percent of gas pipelines in use by 2035 due to reduced utilization by 20 to 60 percent. This would effectively create a “financial death spiral” meaning a vicious circle where fewer customers will lead to less income, leading to higher prices, and so forth. 

According to Mark Dyson, an analyst at the Rocky Mountain Institute, “our story for gas plants is, if you build it, they won’t run. They won’t run at their expected capacity factors. And that filters down to pipelines, too.” 

How to make a sound investment decision

Reducing the risk of stranded resources, investors should be careful in assessing the economic livelihood of proposed energy assets. Two key recommendations could be a useful tool for the development of various projects. First, the systems’ needs should be assessed by using technology-neutral planning processes, which lead to the most economic solutions. Second, the options need to be based on long-term developments to assess the projects’ viability.

The energy sector is going through rapid changes. Technologies that are obvious solutions nowadays, could become obsolete or uneconomic during the lifespan of an asset. Therefore, planners and investors should make careful assessments to prevent wasting money.

By Vanand Meliksetian for Oilprice.com

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Leave a comment
  • Randall Hunt on September 18 2019 said:
    This is blatant renewable energy propaganda. Using the ridiculously biased source of the Rocky Mountain Institute, basically a lobbying organization for renewables, along with lots of "coulds" and future projections of cost decreases speculated, before renewables are competitive. No details on what goes into these supposed very competitive renewable energy electricity costs. You can bet that there was no accounting for the need for backup natural gas power, for when the sun/wind was not sufficient. All this BS will soon come to light, when the subsidies disappear, then we'll see how competitive you are. LOL
  • Ronald Wagner on September 18 2019 said:
    Ditto the above comment. Randall said all that needs to be said. I have studied all of the above for eight years. Just let the markets decide. They know what they are doing. Politicians and greenies do not.
  • Binkley North on September 18 2019 said:
    Yes, I call BS too - once you understand where he is coming from it makes sense, but you cannot extend the cradled economic state of the Netherlands - even Europe - to the planet at large. Especially if you take nuclear off the table. These are specious arguments even if you disregard the huge footprint of wind and solar per kWh
  • Mamdouh Salameh on September 19 2019 said:
    This is a pipedream. The notion of imminent energy transition looks like an illusion. In fact, the percentage of fossil fuels in the world’s energy mix—coal, oil and natural gas—is still lingering well above 80%, a figure that has changed little in 30 years. In fact hydrocarbons accounted for 84.7% of global primary energy consumption in 2018. That remains so despite being challenged by serious environmental policies and despite a global expenditure of $ 3.0 trillion on renewable energy during the last decade. This is a hefty price to pay just to gain only a percentage point of market share from coal.

    Decision-makers, environmentalists and futurists may have to accept the notion that there will neither be a post-oil era nor an imminent energy transition or a peak oil demand throughout the 21st century and probably far beyond. Oil and natural gas will continue to be the core business of oil majors well into the foreseeable future.

    That is why oil, natural gas and LNG will keep renewables stranded throughout the 21st century.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • One Second on September 19 2019 said:
    @ Randall Hunt
    You should really look up all the tax breaks for oil and gas exploration to see what business is really more dependent on subsidies.
  • Daniel Williams on September 25 2019 said:
    Using primary energy values (input energy values) for fossil energy and using output energy values for renewables means that fossil energy looks like its three times more important than it is. If we use the output energy value of both, then the world is about 55% fossil energy and 45% renewables and nuclear. So things will move a lot faster than many people think.

    The problem with shale gas is that the methane leakage is going to destroy the planet. The massive temperature spike over the past decade (9 of the 10 hottest years ever) is almost wholly attributable to the sharp methane uptick since 2007-8 (the start of the shale gas boom), and we know this because the carbon signature found in the methane. Only since last year were there specific satellites monitoring methane.

    At the current trajectory (RCP8.5) two meters of sea level is likely by 2100, rising to 4 meters in another 100-years. This is the level the city of New York uses for planning. Temperatures will be off the charts, wildlife will mostly be dead, globally.

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