The last five years have seen a revolution in terms of the amount of inexpensive U.S. natural gas made available for consumption in power plants, road fuels, and as a feedstock for new and expanded petrochemical plants. We are now even debating the advisability of large volume natural gas exports in the form of liquid natural gas (LNG).
This bonanza has created euphoria in the fossil energy and industrial communities, but has also created something of a “Janus effect” within the Environmental community. To the Romans, Janus (the two faced god) provided a cohesive view of the present as well as an uncertain view of the future. In Rome, the temple to Janus was opened only when Rome was at war. During peace time, presumably because the future was more certain, the doors of the temple remained closed. They were last opened in AD 531 immediately prior to an invasion by the Goths. We all know how well that turned out.
Environmentalists are reacting to the natural gas bonanza in three ways. The first group, which we may define as “pragmatists”, see a hopeful face based on solid evidence that natural gas helps with achieving multiple environmental goals by reducing particulate emissions, sulfur emissions, NOX levels and CO2 emissions. They acknowledge natural gas fueled generators emit approximately 40% less CO2 per kilowatt hour than the older coal-fired units they are largely replacing. Although the aftermath of the recession has reduced the use of most other fuels, natural gas now rivals coal as the major fuel source for power generation in the US.
A second group, the “environmental fatalists” are less impressed with the displacement effects on coal but appreciate that natural gas plants provide crucial support when mandated, for intermittent renewable power options, such as solar and wind. Once renewables represent approximately 10% of aggregate capacity, negative side effects of these “intermittent” sources become problematic; too much dependence on them can cause grid “instability” or, in a worse case, cascading power failures and massive blackouts.
Then there’s the third group, we’ll call the “ideologues.” Often the loudest, this group views natural gas as an implacable enemy for undermining the economic viability of renewable energy projects. They oppose the use of natural gas on principle and call for ever more restrictive regulations and production constraints on natural gas fueled power production. In their view, increasing the costs of generating electric power from natural gas will allow renewable generation finally to achieve cost parity. This “logic” explains at least some of the objections to fracking, an essential requirement for shale gas production, which, if restricted, would seriously undermine production and consumption of additional natural gas in the U.S.
The ideologues believe in “leveling the playing field” so that renewables such as solar and wind can be made economically viable. They see themselves fostering a new economy based on renewable energy. The rest of society’s role is to “shut up” and allow them unimpeded access to scarce and valuable assets (e.g. subsidized prices and preferential access to the grid) in order to wipe fossil fuels off the grid.
Natural gas based power generation represents the ideologue’s worst nightmare. They know that increasing the use of natural gas for a generation undermines the economic value of renewable-based generating companies. It’s not hard to imagine that for those individuals and businesses profiting from renewable subsidies and mandates, natural gas represents a great threat. The argument therefore does make a certain amount of sense if you accept the initial premise.
Renewable mandates generally represent a commandment that “Thou shalt generate e.g. 10% of a given utility’s power output using approved renewable resources”, regardless of the costs to ultimate consumers. Requiring utilities to purchase high priced renewable power under so called feed in tariffs results in those higher prices simply being “rolled in” to the aggregate cost of power delivered to all consumers and duly covered by an aggregate rate requirement.
Such initiatives to support an artificial market for renewable power generation are politically vulnerable, since the public tends to reject mandates forcing investors in renewable energy projects to face bankruptcy as a distinctly possible outcome. Government-guaranteed loans supporting construction of the plants manufacturing new PV solar cells or wind turbines have already outraged a public forced to pay for their bankruptcies.
What is the future of America if the renewable mandate regime expands under state or federal programs? That future is now on display in Germany, a trailblazer in applying subsidies and preferential access to the grid to support the adoption of solar and wind power. The country has not only restricted the construction of new coal and nuclear power units, but also limited the operations of natural gas fueled generation by providing preferential prices and access to the grid for renewables. To be fair, the Germans are also groaning under the cost of imported natural gas supplies, primarily from Russia.
Unfortunately, as a result Germany does not have adequate load following capacity to absorb the ups and downs of renewable power generation. The result is grid instability. These policies are creating potential dangers for an economy heavily dependent on power intensive manufactured exports. Already German petrochemical manufacturers, such as BASF and Bayer, have warned that the country faces grave threats to its manufacturing base due to lower cost competition in the natural gas-rich US. Volkswagen has been equally blunt about their need to manufacture car parts outside of Germany. Remember that Germany’s job pool has roughly 24% of the work force engaged in export focused activity.
The Germans avoid discussing their lack of enthusiasm for searching out low cost coal gas and shale gas deposits in the fatherland. The country now endures an aggregate price of 32 cents/kilowatt hour vs. a US price of about 10 cents/kwh. The bad news is that this already elevated German rate is slated to increase further in the next year, by another 50%, to a level of 48 cents/kwh.
To make it through Germany presumes the good will of neighboring countries which face their own energy challenges. Germany’s current power generation profile has approximately 20% of its power being provided by renewable sources, primarily wind and solar. Germany’s neighbors complain that the country is exporting the grid instability associated with its “green” policies. It’s gotten so bad that the country, which loathes nuclear power, is actually expanding the use of coal fired generation. In essence, coal fired generation is growing in Germany at the expense of higher cost natural gas generation. (The silver lining is that the U.S. is supplying the extra low cost coal required). Naturally, Germany’s CO2 and particulate targets are not being met, while the equivalent US targets are being met ahead of schedule.
Not surprisingly, the German government is now back tracking because their economy cannot support, from a technical or economic perspective, the current level of installed renewables. Angela Merkel has recently called for a more balanced approach to power generation. That will probably mean a policy of diverting subsidies and preferential treatment from solar and wind to natural gas and hydro.
The Current Status in the US
Back here in the US, we’ve managed to spend $97 billion or so on government funded wind and solar projects that certainly will not survive without operating subsidies, feed in tariffs, preferential access to the grid and production mandates.
Fortunately, the US is upgrading our power generation fleet by building new, unsubsidized, gas-fired generation plants throughout the country. We are also seeing new pipeline and grid infrastructure coming to market along with significant expansions of our refining and petrochemical manufacturing facilities, exploiting nonconventional hydrocarbon resources. The bulk of this expenditure is being managed with minimal federal financial support.
However, adverse government regulation of fracking could bring the shale gas band wagon to a sudden halt. (Beyond that, a measurable, multi-year slowdown in permits for new gas pipelines is also having a deleterious effect.)
Recognizing the risks, shale gas proponents are taking another approach. Having apparently convinced the pragmatists and the fatalists of the benefits of natural gas, they are now beginning to spend significant sums in an effort to educate the general electorate and thereby isolate the diehard ideologues.
Fortunately, the majority of the environmental community is not made up of latter day luddites bent on destroying western civilization, just as the majority of the oil and gas industry is not made up of barbarians seeking to plunder the environment. The majority of the population consistently supports measured progress on both the environmental and economic fronts.
The challenge now is to grow support for environmental compromises that produce favorable results for everyone. We still live in a democracy where everyone gets to vote and to have his or her say. However, we do not live in an “Alice and Wonderland” world where everyone can create his own reality. Germany is already facing the downside of listening to their ideological enthusiasts. Let’s take the German lesson to heart, and embrace a more pragmatic approach. It is after all, the American way.
Eric Smith is a Professor of Practice at the A.B. Freeman School of Business at Tulane University. He serves as the Associate Director of the Tulane Energy Institute. He is a Chemical Engineer and has an MBA from the A. B. Freeman School at Tulane University.