Renewable Energy Advances Repel Threat from Lower Natural Gas Prices

Renewable Energy Advances Repel Threat from Lower Natural Gas Prices

This piece was originally published in the March 2016 issue of ei, the magazine of the electroindustry.

By Donald R. Leavens, PhD, Vice President and Chief Economist, NEMA/BIS

For much of this decade, renewable energy investment has struggled to gain a foothold, as utilities facing declining electricity demand and revenue growth have turned to abundant, reliable, and lower-cost natural gas to add capacity and replace coal generation.

More recently, advances in renewable energy technologies have made the costs of generating electricity from wind and solar power increasingly competitive with that of natural gas. At the same time, grid modernization, transmission investment, and developments in energy storage have increased the feasibility of integrating intermittent renewable power sources with existing consistent power sources.

Just as these advances were on the verge of driving the unsubsidized cost of electricity from renewable energy generation below the cost of natural gas generation, however, the shale oil boom drove natural gas prices down by 40 percent in 2015.

The sudden bountiful supply of inexpensive natural gas raised concerns that investment in energy efficiency in general, and renewable generation in particular, would lose momentum. After all, sales of all-electric and hybrid electric vehicles plunged 17 percent last year as gasoline prices plummeted, even as overall light vehicle sales reached a record high.

A recent commentary by McKinsey[1] suggests that such concerns are overblown, concluding that renewable generation investments will continue to grow for several reasons. They point out that the market has room for growth in both renewables and natural gas generation, particularly if renewables continue to see technology advances that reduce costs and increase reliability. The U.S. Energy Information Agency’s most recent projections of generation investment  echo this view.[2]

Energy markets are changing. The high cost of renewable technology limited initial investments to advanced economies. The drop in renewable technology costs, particularly for solar and wind, combined with relatively high fossil fuel costs in less advanced economies, has driven China to become the leader in renewable generation investment. Japan, India, and even Middle Eastern nations are investing heavily in renewables.

Since electricity generation investments are long-term, short-term fluctuations in fuel prices are less relevant to the decision to invest in renewables. For example, the dramatic decline in oil prices since mid-2014 has led to a sharp reduction in natural gas production tied to oil rig operations, which will likely eventually translate into higher natural gas prices.

Finally, although natural gas electricity generation reduces carbon emissions by nearly half compared to generation using coal, it is still a significant source of carbon emissions. Regulations aimed at curbing carbon emissions, plus investment incentives both in the United States and globally, ensure that renewable sources of energy to generate electricity, as well as energy-efficiency enhancements, will be growing factors in the mix of generation fuel sources.

An “all-of-the-above” approach to energy policy bodes well for NEMA companies that offer state-of-the-art technology to provide energy solutions for electricity derived from all fuel sources.

[1]www.mckinsey.com/insights/energy_resources_materials/lower_oil_prices_but_more_renewables_whats_going_on

[2]www.eia.gov/forecasts/aeo/pdf/0383(2015).pdf

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