Two Questions

Many people sighed in relief when the American Recovery and Reinvestment Act became law more than a year ago. I argued in the November/December issue of this magazine that the so-called “stimulus bill” may go down in history as having saved much of the renewable energy industry during the financial crisis of 2008-2009.

But during a session at our renewable energy conference in February in Austin, Ken Bruder, North American general manager for Bloomberg New Energy Finance, raised an interesting question. He wondered whether an unintended outcome of the government’s intervention was to stimulate the renewable industry’s supply side (manufacturing) without also stimulating the demand side. After all, aggregate U.S. electricity demand has fallen for the past two years, the first time that has happened since 1938.

Bruder and his colleagues at BNEF report that 2009 generation supply was less than demand. But data after the first of the year show signs of supply outstripping demand. The question is whether or not demand will recover sufficiently to absorb the supply of equipment and machines produced as a result of the stimulus program. As one alternative, Bruder suggests either fine-tuning the stimulus or creating new policies to help stimulate the demand side of the equation.

A second question is how the cost of natural gas may affect demand for renewable energy. Natural gas is a highly flexible fossil fuel that can be used for baseload electric power generation as well as for quick-start peaking and load following. Even if Congress or the Environmental Protection Agency passes greenhouse gas legislation, natural gas likely will retain its favored status among fossil fuels.

It’s also been the bane of many an electric utility’s existence given its propensity for price volatility. In a sort of Dr. Jeckyl, Mr. Hyde manner the fuel can swing from a plentiful and low-cost resource to an unpredictable and unreliable albatross.

Recent developments, however, suggest that domestic natural gas production may enter a period of benign existence. Large-scale unconventional natural gas plays (that is, natural gas within tight sand or shale geologic formations) are being developed. Their emergence has helped ease much of the fuel’s price volatility. As unconventional resources continue to be developed, some industry experts foresee a decade or more of steady and relatively predictable prices, which could average somewhere in the range of $5/Mcf. Could a stable price environment for natural gas limit growth opportunities for renewable energy resources beyond those mandated by portfolio standards? In other words, once renewable portfolio standards are met, low-cost natural gas could keep a lid on further growth potential.

Of course, RPS mandates are a long way from being met across the country. Although market forces may favor natural gas, renewable energy in many states enjoys favored status from a public policy perspective. In those instances where natural gas and renewable resources compete on a more equal footing, could natural gas’ flexibility be a preferred choice over intermittent renewable resources?

Both questions are worth discussion. Let me know what you think.

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