The following is a guest post by our friends at Bard College’s MBA in Sustainability Program (a 3p sponsor) – for the business leaders of the future who recognize the importance of all business moving towards true sustainability—economic, environmental, and social.
When President Barack Obama was elected in 2008, hopes were high for the future of domestic renewable energy development. The Obama Administration transformed this hope into action by creating new policies, especially those laid out in the American Recovery and Reinvestment Act, aka “the Stimulus Bill,” and strengthening Bush Administration policies and agencies that supported domestic renewable energy development. While these policy decisions and the climate strategy President Obama laid out this week may ultimately have the greatest long-term impact on renewables, natural gas development has arguably been a more significant driver in shaping the pace of renewable energy development over the last five years.
The natural gas boom during the first four years of the Obama Administration has been well-documented. A great deal of attention has been given to one of the processes by which natural gas can be extracted—hydraulic fracturing, aka “fracking,” but less attention has been given to the effect that hydraulic fracturing and its peer, horizontal drilling, have had on the monetary costs of exploration, drilling, and extraction of natural gas.
Currently, domestic natural gas can be bought for approximately $3.78 per MMBTtu (Million British thermal units), making its price cheaper than every renewable energy source—baseload (i.e., hydroelectric) and intermittent (i.e., wind). The current price has even made natural gas a potential long-term replacement for coal. In fact, the Brattle Group found in their report, Potential Coal Plant Retirements: 2012 Update, that the increase in coal plant retirements was “due mainly to lower expected gas prices—despite the somewhat more lenient environmental regulations we currently envision.” The US Energy Information Administration (EIA) recently echoed this finding in a report on coal prices and production in 2012 stating that:
Wholesale (spot) coal prices across all basins fell during the first half of 2012 before stabilizing in the latter half of the year…While spot prices fell across the country, the Appalachian and Powder River Basins were affected the most. With new competition from Illinois Basin and ongoing natural gas displacement, annual average Central and Northern Appalachia prices reflected their most significant declines since 2009, falling 18 and 14 percent, respectively, from 2011.
If the current price of natural gas is forcing coal plants into retirement, what chance do renewable projects have?
In a strange twist of fate, the future of domestic renewable energy development may, in the near-term, be highly dependent on the ability of natural gas development to become more profitable. At the current domestic price, natural gas companies are not realizing the profits that the boom in production would suggest. In 2012 alone, the price range for natural gas per MMBtu was approximately $16-18 in Asian markets, $10-12 in European markets, and $2-4 in U.S. markets. Consequently, many companies are searching for ways to export liquefied natural gas (LNG)—easier and more cost effective to transport than natural gas in its gaseous state—to international markets. If domestic natural gas companies were able to more easily export LNG to Asian and European markets, these companies would be able to sell their product at a potentially higher price and simultaneously reduce the supply of domestic natural gas.
At the moment, Cheniere Energy’s Sabine Pass terminal and ConocoPhillips’s majority-owned Freeport LNG terminal are the only export terminals that the Federal Energy Regulatory Commission has approved. ConocoPhillips’s temporarily shutdown Kenai LNG Plant in Alaska had been the only LNG export terminal in the U.S. prior to these approvals. A number of export terminal applications have been submitted, but without swift movement on them, the U.S. energy market will continue to be flooded by domestic natural gas and renewable energy projects will struggle to be price competitive. Thus, the bridge fuel known as natural gas may actually become a bridge to nowhere by destroying its landing.
That said, if natural gas prices rise, there is a question about whether coal will again become price competitive and negate a possible increase in renewable energy development. However, this is unlikely because, if prices rise, coal will likely only become price competitive with natural gas in the short-term because coal power plants are fighting a different battle with the EPA—a regulation and compliance battle. In the long-term, new EPA regulations and emissions rules will likely favor natural gas because “compared to the average air emissions from coal-fired generation, natural gas produces half as much carbon dioxide, less than a third as much nitrogen oxides, and one percent as much sulfur oxides.”
While causes and correlations can be debated, it is clear that renewable energy sources are not currently price competitive with natural gas. The invention of new disruptive renewable technologies, a black swan climate event, or major national/international policies may change this dynamic in the mid- to long-term. But, as long as domestic natural gas prices remain within their current price range, it will be a challenge for any domestic renewable source to compete.
Brady McCartney is currently a dual MBA/MS degree candidate at Bard College’s MBA Program in Sustainability and Center for Environmental Policy and a summer researcher at Resources for the Future. Follow Brady on Twitter.
[Image Credit: fplsolar, Flickr]