Natural Gas Boom Won’t Stall U.S. Renewables

The recent plummet of the natural gas spot price to a 28-month low has stirred discussion about implications for renewable energy—the majority electrical generating component in RMI’s vision of the 2050 U.S. energy economy.

Since mid-2009, it has been increasingly clear that the amount of natural gas supplied via hydraulic fracturing (popularly known as “fracking”) will create an oversupplied domestic natural gas market. The resulting low gas prices depress contract pricing for long-term power sales to utilities. This situation poses significant challenges for new, utility-scale renewable power projects, which must secure contracts with attractive fixed prices to obtain financing.

Yet, while fracking to unlock America’s shale gas reserves poses a near-term threat to the rate of utility-scale renewable energy development, it offers significantly lower risk to growth of domestic renewable energy just a few years out.

That’s in part because natural gas faces significant upward pricing pressure. Increased regulation, long-term underperformance of production wells, and higher-priced drilling leases all should push prices up on the supply side. On the demand side, increased use of compressed natural gas in vehicles, exporting of liquefied natural gas, and, most significantly, increased natural gas demand for electrical generation, replacing coal, also should elevate prices.

Even against the current natural gas futures pricing curve—much lower than just a few months ago—utility-scale renewables can compete unsubsidized within a few years. In good wind locations, wind power can already compete unsubsidized with natural gas selling for more than $6 per million BTU. According to Bloomberg New Energy Finance, wind turbine pricing has averaged 14 percent per-year declines since the mid-1980s. If that continues, by 2016 wind power should compete head-on in a growing number of locations with wholesale natural gas, which by then is expected to sell above the mid-$4s per million BTU.

Continued Year-Over-Year Growth

Even in the short term, while low natural gas prices will likely slow the deployment of renewable energy capacity, they may not stop absolute year-over-year growth.

First, in 2012 special financing circumstances will keep work going and capital flowing. Many project developers invested the necessary 5 percent minimum of total project costs prior to Dec. 31, 2011, qualifying these projects to receive a 30 percent Treasury grant. Many of these projects also signed power purchase agreements with utilities at attractive prices before the current dip in natural gas pricing. In addition, 50 percent bonus accelerated depreciation is available.

Solar PV Boom

A boom is projected to accelerate in distributed solar photovoltaic (PV) development, which is less affected by low natural gas prices. While utility-scale renewable generation must compete against wholesale prices, distributed renewable installations such as solar panels on a factory roof compete against retail power rates. Those projects generate electricity used on site and reduce that business’s bill at the higher retail rates, which on a national average continue to rise despite falling wholesale prices.

While the retail rates are rising, solar PV development costs are rapidly decreasing. By the beginning of 2013, crystalline (industry “standard”) solar module costs are predicted by energy analysts to reach 70 cents/watt, dropping total cost of commercial installations to approximately $2.70/W and residential installations to about $3.60/W, based on Department of Energy SunShot data. These whole-system installation prices represent reductions of more than 50 percent from as recently as 2007.

Grid parity, the point at which renewables are price competitive with the existing grid, primarily based on coal- and gas-fired electricity generation, has already begun, with average retail prices in Hawaii above those levels, as are top retail prices in other states, such as California. While Hawaii and California feature some of the most expensive retail rates in the U.S., the fact that they have attained grid parity for many retail ratepayers indicates more areas will reach the grid parity tipping
point with each penny drop in the price of solar PV
installations.

The Takeaway

Cheap natural gas presents a challenge to utility-scale renewable power growth over the next couple of years, but increased distributed solar PV deployment may bridge the gap. RMI is working with utilities, public service commissions, financiers, and others empowered to enable PV deployment to exploit and accelerate this near-term opportunity. Long term, the relentless cost curve of both utility-scale wind and solar PV—as well as natural gas’s and coal’s environmental and market dynamic factors—will inevitably lead to accelerated build-out of renewable power.