WILL THE UNCONVENTIONAL GAS BOOM HURT RENEWABLES?
By Jon Respati
With some countries in the developed world starting to drill for shale gas in their own backyards, the focus of energy investments may go to that direction.Will this lead to depressing investment in renewable energy?
While environmentalists are still debating whether shale gas drilling is environmentally hazardous or no more than a sophisticated way of extracting natural gas from the earth, it is widely considered by global energy experts as a potential contender to renewables (and for sure nuclear) since as an energy source it is much cleaner than oils, and there are seemingly abundant reserves that could be tapped using new drilling technology, resulting in a sale price which is highly competitive against any other energy resources.
Some global political observers even think that the abundance of this new kind of gas may change the current geopolitics. For sure, in this context, if the US and other western countries start to use shale gas to reduce their dependence on oils from the Middle East and South America, it could ease the tension in the Hormuz Strait and politically the US may look at Iran’s nuclear escapade more objectively. But even if the shale gas is indeed abundant and the current price is relatively low, how long would it be before it catches up with the oil price is the question? It’s price will for sure increase one day as demands continue to go up. Afterall, the gas is fossil energy which inevitably meet the same fate as other fossil energy. It must eventually run out because it is non-renewable.
Stephen Lacey, of Climate Progress, found that cheap natural gas prices are one of the biggest short-term threats to the use of renewable energy in the US today. With a glut of gas dropping prices to historic lows, the competitiveness of technologies like wind, solar PV, and solar hot water is facing significant challenges.
But Lacey concludes that while the renewable industries are indeed being challenged, it is most likely that they are not beaten. He finds that amidst all the hand wringing over what cheap natural gas will do to investment in renewables, we often lose sight of the fact that the cost and price of renewable energy technologies are still chasing the record price drops in natural gas. In other words, one should not forget that the whole world, led by Germany and the US in terms of technology, and other emerging economic powerhouses like China and India, are continuing to find new technologies, which could make renewable energy like solar and wind increasingly cheaper so becoming more and more competitive with oils – even shale oil.
Investment in renewable energy is the choice to make in the wake of global warming and other climate change issues that the world is facing. Being an activist in the Indonesian Renewable Energy Societies (IRES), I personally have made this statement many times, especially in trying to convince the government of the need to create regulations supporting renewable energy development in Indonesia. It is indeed true that all investments must ultimately rise or fall on their economic merits, but there are also other things that must influence our choice to invest on new things in a situation where the economic merits are blurred by various intervening factors like the disguised – or even blatant – subsidies that many goverments give to oils, gas, and nuclear.
A good example of this is when the German government decided to promote using solar PV around two decades ago, while accepting that solar PV was far from competitive against the conventional energy which the country was depending on. Thanks to the farsightness of German politicians, the country has become the clear example of how renewable energy must be developed and supported to get its eventual economic merits.
Renewable energy is definitely a home-grown or domestic resource and investing in it will clearly benefit the local economy, empower local communities, encourage entrepreneurial innovation, and spur new types of economic development. But ultimately, in addition to ensuring national energy security, renewables are an important tool for helping the country reduce greenhouse gas emissions and combat global warming. Lacey shows estimate of the time needed by gas resources in the US to last (see table 1).
In the American context, Lacey pitted gas against wind development a few years back.When gas prices started their precipitous drop, at the American Wind Energy Association’s annual conference in 2010 the topic dominated the CEO roundtable discussion.The wind business executives attending the conference believed that the single biggest challenge is improving wind technologies to compete with the lower gas prices.
The industry clearly took the challenge seriously.Today, due to bigger turbines, more reliable equipment and better materials, the cost of wind has dropped to record lows, where some developers have even signed long-term power purchase agreements in the 3 cents per kilowatt-hour range. Late last year Bloomberg New Energy Finance projected that wind would be fully competitive with energy produced from combined-cycle gas turbines by 2016 under fair trading conditions.The same technological improvements and maturation in project development in wind are driving down the cost of solar PV as well, as abundant examples in the world have shown.
These trends are driving record levels of interest from investors. In 2011, for the first time ever, global investments in renewable energy surpassed investments in fossil fuels.The bottom line: the price of renewable energy continues to come down while the projected price of natural gas is only expected to rise, as indicated in the following table (source: Lazard Capital Markets, quoted by Lacey)
So gas, conventional or not, is and will be an important short-term tool to effectively reduce or replace coal-based power plants, and it could even provide a back-up for intermittent renewables, like solar and wind, the key components for combating the global warming challenge. Seen on this basis, shale gas euphoria is not such a bad thing at all.
But, since natural gas (including shale gas) is still a fossil fuel, if the world is getting serious about addressing global warming and eventually an increasing number of countries will put a price on greenhouse gas emissions, the current economic advantages of natural gas will diminish or even disappear over time.
Indonesia’s Gas Position
Indonesia has abundant reserves of natural gas. This has been proven since over four decades ago during Suharto Administration. In the early eighties one of the world’s largest gas reserves was found in North Sumatra, and another large reserve was later found in East Kalimantan. But back then, gas was almost considered as a by product, just a ‘bonus’ from oil exploration. Accordingly, the country did not use the gas to conserve more valuable oil, but it sold much of its gas production (under long term contracts) to foreign countries like Japan, China, and the USA. Now, when the time has come to use more gas to conserve oil and reduce the green house gas emissions, and with the country’s oil production stagnated at a lower level than the country needs for development, the country can not use it effectively to reduce the swelling oil price subisidies which now totaling over $20 billion annually. Some local experts believe that shale or unconventional natural gas could also be found and exploited here, but even if this is true, the country needs to build the necessary infrastructure to effectively use this resource to reduce dependence on oils and coals, which now account for over 90% of the primary energy used to generate electricity. How would natural gas development stand against renewable energy? It is very hard to say, since the national investments on renewables are relatively very low.
So Lacey and other energy observers may be right in saying that natural gas certainly has a role to play in this current energy transition — assuming we properly value its environmental impact. Calls from forward-thinking global investors to take the low-carbon strategy seriously will not be swept aside, no matter what the short-term challenges are.
Impacts on Nuclear
Impacts of low price gas, thanks to the abundant unconventional gas in developed countries is more directly felt by the nuclear industry, at least in the USA. Rebecca Smith and Daniel Gilbert reported in the Wall Street Journal recently that cheap natural gas unplugs the US nuclear-power revival (WSJ March 19, 2012). The report says that out of 29 new reactors planned for development involving 15 power company in the US, only 2 projects were coming into the execution stage. Based on this report’s analysis, it is suspected that what has killed the ‘nuclear renaissance’ recently was not the Fukhushima nuclear meltdown, or the strongly increased development prices that followed, but cheap and abundant natural gas, which although it is less clean compared to nuclear, is certainly much cheaper, easier, and faster to develop, and safer.
US Federal statistics quoted in the report indicate that utilities are turning to natural gas to generate electricity with 258 plants to be built in the next four years till 2015. According to the US Energy Information Administration (US-EIA), the cost to build a relatively big gas-fired power plant (over 1,000 MW) is less than $1 million per MW, compared to over $5 million per MW for a nuclear power plant. Nuclear power plants require large capacity to reach their true economic merits. Other EIA figures quoted by WSJ indicate expected addition to US power-generation in the next 25 years as 58.1% using natural gas, compared to 30.6% of total renewables, and only 4.3% nuclear and 7.6% coals and oils.
But the picture of nuclear power development in some other countries looks rather different, especially those which do not have access to cheap natural gas. Some emerging economies like China, India, and Korea, are planning, or are in the process of building, relatively large nuclear power plant capacities (see RESPECTS edition 12 Vol. 1). But if the lessons from Japan and Germany on one hand and Iran and North Korea on the other are considered, the decision to build nuclear power plants is not based only on economics.
Buying time for renewables
So looking globally and from different perspectives, the low price gas phenomena will not directly and negatively impact the nuclear power development. The same thing could be said on renewable energy development. Indonesia may learn from what’s happening in the USA that effective use of gas in power generation is in fact a boon to renewable energy development.
Building more gas power plants, could help the country buy time for developing the abundant resources of renewables in the country like geothermal, hydro, and solar to achieve the national energy security objectives. But to get there, the government has to act soon and in more rigorous and consistent ways than what we have seen so far, not least by making clear and concrete action plans supported by effective regulations toward achieving the target set earlier in 2006 at 17% of total energy mix by 2025, or 25% as envisioned by the Minister of Energy and Mineral Resources in 2010.