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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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Precipitous Fall In NatGas Prices Slows Down Energy Investment Here

Renewable energy costs continue to decline according to the U.S. Department of Energy (“Revolution Now”, September 2016). Since the DOE is often late to the party, we would not be surprised if current cost estimates were even lower than those published. But let's stick with government numbers for now. Costs for six renewable or energy saving technologies fell by one half (48%) from 2008 to 2012 and an average of 63% over the last eight years, 2008-2015 (The analyses are in nominal dollars and exclude the impact of investment tax and production credits). Figure 1 shows these cost trends.

By way of contrast the conventional energy sector in the U.S. (2008-2015) showed prices for electricity as well as coal delivered to power plants both up 7%. Natural gas prices delivered to power stations fell by 70%. With delivered gas prices now below that of coal, new renewables without subsidies will have to compete against gas for market share. Figure 2 shows the cost trends for electricity, gas and coal.

As analysts we feel compelled to point out that the data in these analyses, which are derived from many sources, are often not comparable. But one aspect of the reported numbers got our attention--although apparently not the government’s. For the period 2008-2012, the decline in renewables costs were greater than that of the period 2008-2015 (even adjusted for the shorter period covered).

One moral of our brief story may be to avoid using rulers (or any device with a straight edge) to make projections about technology. But it is also possible the data is showing us that new technologies in energy, such as LED lighting, are reaching technological maturity or perhaps some sort of plateau. And further energy saving gains will come from applying the technology rather than perfecting it. We should further point out that the speed of application may also depend on regulatory rules that determine how new technologies are integrated into the existing electrical grid structure. Related: Is The Glut Coming To An End? Cushing Stocks Fall To 10 Month Low

However, there is another explanation--the precipitous fall in natural gas prices discouraged investment in new energy technologies. Venture capitalists have the same motivations as the CEOs of big corporations. Both worry about trends in quarterly earnings. Neither wants to invest too soon. And if they believe natural gas prices will remain lower for longer, why rush to develop products that will have to compete with cheap gas?

Our overall message, though, is that energy innovators have clearly invested in research and development to produce better or cheaper products. Natural gas drillers have done the same. New drilling technologies, along with access to cheap capital, have driven down costs leading to sharply falling prices. But neither coal miners nor legacy electricity providers have done so. And that is likely to remain a problem for them

(Click to enlarge)

Figure 1. Cost trends for alternative energy technologies (2008=100)

(Click to enlarge)

Figure 2. Cost trends for conventional energy sources (2008=100)

By Leonard Hyman and William Tilles

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  • JHM on October 04 2016 said:
    No doubt that wind and solar are pushing below $25/MWh where most competitice and squeezing gas and coal on price. Fuel priced at $3/mmbtu is no longer competitive with renewables. So any hope that natural gas can return to prices above $4/mmbtu fails to appreciate the competive reality. The only way for gas to extract a premium price above renewables is to shrink volume into niche markets. LNG is no solution. It's got to compete with the same low cost of wind and solar nearly everywhere on the globe, and will soon not be worth the cost to liquid and ship anywhere. It's over folks.
  • randy verret on October 04 2016 said:
    I would not plan on "tap dancing" on oil & gas' graves just yet. At present, only 20% of the worlds energy is supplied by electricity, which is where your renewables fit into the picture. The rest of that energy consumption is (primarily) for transportation, so wind & solar don't apply and there is no large scale alternative currently available that can beat oil & gas out of the market. It'll be around for a while...
  • TheJack on October 05 2016 said:
    The only way "renewables" can compete with natgas is by government subsides. Only have to look as far as Germany to see how "low cost" they are anyway. But it's nice to have dreams, at least as long as your not the one having to pay for them.

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