Many homeowners use electricity as their primary source of power, however, there are some who turn to natural gas. Whether this choice is due to a preference or an availability, there are both pros and cons to using natural gas. Recently, our HVAC installation experts came across an article by Paulo Santos that discusses the rise of natural gas and the effect renewables could have on it. We thought we’d share:
“Commonly, I’d say most of us expect U.S. natural gas (UNG) to see increased usage over time. Coal is on its deathbed, nuclear power is seeing blowback since the Fukushima disaster, and U.S. natural gas seems perennially cheap. Adding these things together seems to indicate that, over time, we’ll see increased natural gas usage. This might/should push natural gas prices upward. To this, I would add that the development of LNG export facilities, like those built by Cheniere Energy (LNG), provide potential for increased natural gas demand.
Well, this all sounds good, but I am about to describe a risk that’s not as often considered. It’s a risk that looms pretty large, and whose materialization has already been seen elsewhere.
What Is This Risk?
The risk has a name: renewables. Renewable sources of energy, which are most often used to produce electricity, include things such as solar generation or wind generation. Why are renewables a risk? Let me explain:
Approximately 38.3% of the natural gas consumed in the U.S. is used to produce electricity. Residential plus commercial users consume ~30.1% of the natural gas, and their consumption has been rather stable over time. Industrial users consume ~31.5% of the natural gas, and while their usage has been growing recently due to cheap natural gas, it can be said to be stable over a longer time frame. As a result, demand for electricity generation has been responsible for all natural gas consumption growth in the U.S.
Now, it is this demand for electricity generation which is at risk. The risk comes from the fact that renewables (ex-hydroelectric) are growing quickly, and have gone from 7.1% of all power generation in 2014 to 9.5% in 2017 (ttm). This happened in the context of stable electricity generation. Electricity generation in the U.S. in 2017 (ttm) is lower than it was back in 2011.
Renewables (ex-hydroelectric) are often what’s called “must run.” That is, if solar or wind is generating power, the grid must take it. Someone else has to shut down. On the other hand, natural gas generation is most often both the “marginal producer” (the last to come in when prices are higher, the first to go out if they drop) and a flexible producer (one with the ability to ramp up and down quickly). As a result, added generation of the kind renewables offer mostly tends to displace natural gas generation. Therein lies the risk.
Compensating for this effect are, at times, political factors, such as a drive toward shutting down coal by subjecting it to more stringent emission rules. However, with the Trump administration this political drive isn’t there, and won’t be there for several years. The result, of course, is that as renewables grow through time, natural gas is, again, the prime victim. Also, in case you think this is fantasy, there is an actual precedent as the exact same thing happened in Europe.
Renewables’ development is further along in Europe compared to the U.S. But it should tend to catch up. As a result, the dynamics above might well be in out full force as we speak. Indeed, natural gas demand (ttm) for power generation has been heading down for a year or so already. There’s obviously the possibility that this was simply due to weather. Still, the inexorable growth in renewables generation is a fact, so even if it wasn’t structural this past year, it can turn structural at any time.
The growth in renewable power generation poses a direct threat to natural gas volumes and prices. As a result, this threat can impact natural gas E&P companies. This is because of the loss of volumes and pricing. It can also impact pipelines, which supply natural gas to the market. This is because of the loss of volumes and the increased risk from possible E&P failures.
This isn’t a merely theoretical threat. We’ve already seen its impact in Europe, where natural gas volumes fell a lot. Ultimately, pricing also fell a lot, and indeed has fallen below the cost of landed U.S. LNG. Right now, Europe is stabilizing on account of political action leading to the closure of nuclear and coal power plants. However, such political action does not seem likely right now in the U.S.”