Movers and SHAKERS
Falling Renewable Costs Could Strand Up to $1 Trillion of Natural Gas Assets
Ten years ago, the American Gas Association declared natural gas to be the bridge to a clean energy future. Natural gas is the cleanest burning of all carbon-based fuels. With new environmental restrictions pushing coal and oil out of the picture and renewable energy sources not yet economically competitive, natural gas was in a good position to fill the gap. Projections around 2015 show that analysts expected coal consumption to fall dramatically, with natural gas consumption soaring to replace coal’s place.
Fast forward five years, and we see that coal has indeed lost market share. Coal consumption has fallen from 40% ten years ago to a current level of 11%. Natural gas has picked up much of this market share, rising from 25% to 32%. However, renewable energy sources, notably wind and solar, have grown faster than anticipated and now represent 11% of all energy consumption, a level equal to coal.
The change in consumption patterns can best be explained by looking at electric generation sources. Coal, which once accounted for half of all power production, now represents only 24%. Natural gas, on the other hand, has increased from a 25% market share to 37% of all power generated. However, this trend shows signs of ending. The chart below from the U.S. Energy Information Administration shows that analysts expect coal and nuclear to continue to decline, but that it will be renewable energy, not natural gas, that grabs market share in the next few years. Forecasts even call for natural gas’s market share to show a decline.
The case for natural gas as a key component of power generation is simple. In addition to being more economically friendly than other carbon fuels, natural gas works well in smaller, simple-cycle, turbine power plants that can economically serve peak power demand. These plants may only run a few hours a day but can be started up and shut down at little cost, unlike traditional baseload plants. This is important because renewable wind and solar plants are inconsistent and do not serve peak power demand well.
Still, investing in new natural gas power plants is risky. A gas power plant will produce electricity for decades. Natural gas pipeline and storage units last even longer. If renewable energy continues to become more cost-effective as it grows and the ability to store energy improves, natural gas assets could become stranded. Sean Kidney, CEO of the Climate Bonds Initiate, claims, “The window to do gas unabated has closed.” A report by Rethink Energy estimates that investments in natural gas power generation could lead to $1 trillion in losses by 2050, a scary thought for regulated utilities that are granted limited returns on their investments.
We expect natural gas to remain an important energy source for the foreseeable future. Energy plant investors typically want to invest in multiple energy sources and not rely on one energy source. The energy source that is cheapest today may not be the cheapest tomorrow—technology changes, environmental regulations change, the cost of production changes. That said, signs are beginning to point towards a diminished role for natural gas going forward.
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https://www.earthisland.org/journal/index.php/magazine/entry/natural_gas_a_bridge_to_nowhere/, Jennifer Krill, Earth Island Journal, Spring 2015
https://ourworld.unu.edu/en/us-natural-gas-revolution-is-a-bridge-to-nowhere, Belinda Waymouth, Our World, September 24, 2014
https://www.power-technology.com/features/bridge-to-nowhere-does-natural-gas-energy-have-a-future/, Heidi Vella, Power Technology, July 6, 2020
https://www.petroleum-economist.com/articles/low-carbon-energy/energy-transition/2020/gas-a-bridge-to-nowhere, Beatrice Bedeschi, Petroleum Economist, February 13, 2020
https://energyinnovation.org/wp-content/uploads/2020/03/Natural-Gas_A-Bridge-to-Climate-Breakdown.pdf, Lila Holzman, Mike O’Boyle and Daniel Stewart, As You Sow, March 2020
https://www.eia.gov/energyexplained/us-energy-facts/, U.S. Energy Information Administration, June 2020
Photo: Photographer,Michael Lewinski, Harquahala Natural Gas Generating Facility, Tonopah, AZ