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Clean Energy and the Challenge of Low-Cost Natural Gas

There is a strong case for an energy future that moves beyond highly polluting coal and extremely volatile nuclear power, and towards a marriage of efficiency/smart grid, renewables, and natural gas. But in a world of low-cost natural gas, currently at less than $2.50 per million BTU in the U.S. (it's closer to six times that amount, or $15, in Europe and Asia), how can solar, wind, and other clean energy sources compete? Does low-cost natural gas, which could last for years or decades in the U.S., mean the end of clean tech as we know it?

At the recent Clean-Tech Investor Summit, Mike Allman, president and CEO of Southern California Gas Company, the nation’s largest natural gas distribution utility, had some cautionary words. Allman, who in his former role at the helm of Sempra Generation helped build the nation’s largest solar PV plant, explained that centralized solar just couldn’t compete against low-cost natural gas. He could be right, and this presents some serious challenges to renewables in a future of low cost, natural gas-powered electricity.  

But I believe a number of factors are likely to ensure that we see more of a complementary future unfold. First of all, state-level renewable portfolio standards, some with solar carve-outs, will ensure that solar is part of the future energy mix in many regions of our nation. Second, while the cost of wholesale produced electricity from natural gas may be as low as 5-8 cents per kWh, by the time that electricity gets to end consumers in places like San Diego and Los Angeles, the cost on the customers’ side of the meter is closer to 20 cents per kWh.  In this scenario, distributed solar on residential and commercial rooftops can compete very effectively at the retail level. Finally, a new generation of natural gas power plants, such as those being designed by GE, is being optimized to provide baseload power and load sharing with solar, wind, and other renewable sources. The pairing of low cost, next-generation baseload natural gas with zero-emissions intermittent renewables seems like a win-win to me.

And it’s not just about solar vs. natural gas. As Allman pointed out in his talk, efficiency measures, biogas, stationary fuel cells, and other measures are all likely going to be part of our energy future — and some of these could actually leverage low-cost natural gas. On the transport front, it looks increasingly like electrification and natural gas offer a much cheaper alternative to oil. And of course, there’s wind power, which in many cases is now cost-comparable to natural gas-fired wholesale electricity prices, even in the U.S.

There is also one wild card that could significantly impact a long-term, low-cost natural gas future. At Clean Edge we believe that natural gas will play a significant role in supporting a cleaner energy future — but it cannot be done at the risk of polluted local communities and despoiled water and land. In other words, increasingly contentious complaints about hydraulic fracturing (fracking) need to be carefully evaluated, fracking must be properly regulated, and natural gas prospecting has to move from a Wild West gold rush to a more measured and balanced approach.

It’s going to be interesting to see how all of these technologies develop and support or hinder one another. Solar cells, for example, which are mostly made from silicon (the same basic material used in manufacturing computer chips), are now exhibiting economies of scale only seen in earlier high-tech revolutions. Between 2007 and 2011, solar PV total system costs (including PV modules, balance of system components, and installation) dropped by more than half. Contrary to critics who say the industry isn’t ready for prime time, solar is, in fact, becoming increasingly cost-competitive, even compared with low-cost natural gas.

In 2011, for example, nearly 70 percent of new electricity capacity in the European Union came from renewables. Granted, this has as much to do with government incentives and supports as lower pricing, but solar PV and wind power accounted for 47 percent and 21 percent of new additions respectively. Add in natural gas, which made up 22 percent of new capacity installations in Europe, and these three sources are proving the energy sources of choice, representing 90 percent of new capacity additions in 2011. By contrast, coal and nuclear’s contribution to new generation capacity in Europe was just 5 percent and 1 percent respectively.

In my mind, such statistics demonstrate that many nations are clearly moving away from a reliance primarily on extractive, fossil-fuel industries and volatile nuclear power to a new world based on renewables, a digital smart grid, zero-emission vehicles, green buildings, and more. The U.S., Japan, and much of Europe will not likely opt for an “all-of-the-above” energy future like in rapidly developing nations such as China and India, but will instead focus on a range of cleaner, non-nuclear options. In the U.S. in particular, where natural gas prices are so low, this should bode well for an emerging natural-gas/renewables/efficiency triumvirate that serves industry, governments, and local communities.

Ron Pernick is cofounder and managing director of clean-tech research and advisory firm Clean Edge and co-author (with Clint Wilder) of the highly acclaimed business book The Clean Tech Revolution and the forthcoming book Clean Tech Nation.

Image: Arogant via Shutterstock

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