Energy / Politics

Natural Gas: A Fuel to Rule Them All?

Hardly a day goes by where a new story trumpeting the American natural gas “revolution” isn’t prominently displayed in the newspaper: talk of exports is reemerging after decades; the price of natural gas for electricity has dropped by half between its 2008 high and 2013; IHS estimates that unconventional drilling supports 1.7 million jobs. Furthermore, as climate concerns become an ever-greater focus of energy policy, supporters point out that natural gas produces half as much CO2 as coal when used for generation.

Natural gas’ immediate future is so bright that many environmentalists worry that rather than being a bridge to a low carbon future, natural gas will crowd out renewables. Low gas costs will make renewables uneconomical. But big change is looming on the natural gas horizon; in the EIA’s recent projections for natural gas through 2040 prices are estimated to roughly double (in constant dollars), meaning renewable energy will still have a robust place in America’s electricity sector.

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Although natural gas is being extracted in ever greater volumes, it faces challenges to maintaining its low price crown. The EIA projects that extraction from low cost plays will gradually decline, requiring producers to migrate to where gas is more difficult to develop and therefore more expensive. Competition from industry will also raise overall demand, as companies construct or expand operations that use it as an input.

Natural gas also faces environmental concerns that could limit its competitiveness in the future. Although having lower GHG emissions than coal or oil, natural gas still contributes to climate change and methane’s impact is up to 20 times larger than carbon dioxide. There is a growing call for limits on carbon emissions, whether by mandate, tax, or cap-and-trade. Though the EIA adds 3 percent to the cost of capital only for GHG intensive technologies in its reference case, it is not difficult to imagine some environmental cost being added later to the fuel. Future regulations and policies may undercut the advantages that natural gas enjoys relative to renewables.

Higher costs for natural gas and lower costs for renewables will probably create a scenario in which the latter becomes marginally more competitive in marginally less efficient geographies. The EIA sees wind and solar becoming more cost efficient (when comparing LACE and LCOE) over longer horizons. Indeed, the range of differences between the two measurements (imperfect as they are) is most positive for onshore wind and solar photovoltaic, although they are also highly variable. Unlike non-renewable resources, fuel costs are much cheaper and they benefit from more rapidly decreasing costs.

The future will probably see natural gas plants being developed to augment peak demand or other times when renewables are unavailable. (The costs in the graph above are average annual costs. Spot prices reflect seasonal demand and supply). Distributed power systems using renewable energy, which are in their relative infancy, will also compose a greater share of the US power sector.

The natural gas bonanza has undoubtedly been a boon to the American economy. However, greater demand for the fuel and fewer new finds will contribute to higher natural gas prices, while those of renewables will continue to fall. Therefore, the theme of America’s energy future is not of one fuel to rule them all, but a complicated dance amongst many competing sources, and it is up to advocates of renewables to maximize the advantages of theirs in the marketplace.