What Do Falling Natural Gas Prices Mean for Renewables?

According to the U.S. Energy Information Administration, average natural gas prices on the wholesale spot market dropped another 9% in 2011, falling to the second-lowest price average since 2002. And the agency expects prices to fall substantially in 2012 due to record-high inventories of supply.

In a few short years, domestic energy supply has undergone a major shift in favor of natural gas, challenging the economics of renewable energy technologies that compete directly with the resource. It’s not exactly the kind of shift that renewable energy proponents imagined. But it has helped keep electricity and heating prices low, while also shifting enthusiasm away from coal. Those are notable short-term victories — assuming renewables don’t get swept aside in the process.

The picture is mixed. Although wind development has dropped off a cliff in states like Texas, in part because of low gas prices, Bloomberg New Energy Finance believes that wind will be competitive across the board with natural gas by 2016. And in utility-scale solar, large photovoltaic projects are also keeping pace with projected prices of natural gas.

However, a study released earlier this month by the Massachusetts Institute of Technology modeled an energy scenario with and without shale gas, finding that renewables were indeed being negatively impacted:

The continued need for strong renewables prompts concerns, as the study finds that shale use suppresses the development of renewables. Under one scenario, for example, the researchers impose a renewable-fuel mandate. They find that, with shale, renewable use never goes beyond the 25 percent minimum standard they set — but when shale is removed from the market, renewables gain more ground.

We should also always remember that some of the leading (center-right) economists in the country — Nicholas Z. Muller, Robert Mendelsohn, and William Nordhaus — publishing in a top economics journal found that natural gas damages were larger than its value added for electricity generation even at a low-ball carbon price of $27 per ton. At a price of $65 a ton of carbon, the total damages from natural gas are more than double its value-added.

That means renewable energy deserves strong support by state and federal policymakers even in the face of low natural gas prices.

So will the slide in gas prices continue? Not according to some forecasts. EIA expects prices to riseagain in 2013. With an increase in exports, a build out of new combined cycle power plants and continued questions about how much shale gas is actually in the ground (it’s still a lot, even on the low end of estimates), IDC Energy Insights Analyst Sam Jaffe doesn’t see how prices can stay as low as they are today:

Electric power production accounted for approximately 24% of overall U.S. gas consumption. Keep in mind that much of that power production is done with peaker plants, not baseload plants. The new plants that are being built are mostly combined cycle baseload plants, thus if we were to double NG-sourced electricity over the next decade, it would actually end up with a tripling of NG consumption by the power sector. That means an overall doubling (approximately) of NG demand. There’s no way that you can double demand in a product and expect its price to remain the same.

The MIT researchers who found that shale gas has a substantial impact to renewable energy argued the same thing:

But [Henry Jacoby, co-director emeritus of MIT’s Joint Program on the Science and Policy of Global Change] warns, “Natural gas is a finite resource. We will eventually run into depletion and higher cost.” He adds, “It still releases greenhouse gas emissions. So if we’re going to get to a point where we strictly limit those emissions, we need renewables.”

In the meantime, however, gas prices are very low. And aside from the political freeze in Washington, this will be one of the biggest challenges for renewable energy in 2012.

However, it does say a lot that renewable energy technologies continue to nip at the heels of natural gas, even with a “revolution” underway in shale gas production.

This article was originally published on Climate Progress and was republished with permission.