NARUC 2017: Are the days of cheap natural gas numbered?
Higher demand for gas could spark greater price volatility and spell bad news for the climate, analysts said.
If there’s one defining feature of the modern U.S. electricity sector, it’s low gas prices.
Since advances in fracking and horizontal drilling lowered the price of gas at the beginning of the decade, the fuel has taken the sector by storm. Last year, gas surpassed coal as the top power generation resource, and the low prices have enabled the coal-to-gas switching that’s responsible for most U.S. CO2 emission reductions to date.
At the summer meetings for the National Association of Regulatory Utility Commissions (NARUC) in San Diego this week, Suzanne Lemieux, manager of midstream operations for the American Petroleum Institute, put the supply boom into stark relief. Looking back at the 2012 EIA Annual Energy Outlook — an influential yearly energy report from the federal government — she said gas production over the past five years has exceeded even its most aggressive predictions.
“We’ve been able to outpace even the highest [estimated] case in production and that is largely due to the competitive nature of the oil and gas industry,” she said.
Looking ahead, Lemieux said EIA’s most recent projections see a continuation of cheap to moderately-priced gas for decades to come, cementing its role as a central generation resource: “Out to 2040, we still see a spread of between $3.40 to $5 [per mmBtu], so out to 2040 with available resources we still see an extremely competitive resource that we're able to extract.”
But those EIA estimates rely on some faulty assumptions, according to Andrew Weissman, founder of EBW Analytics, a market research firm.
“What studies do that I think is important to understand is essentially they assume you already know how much [gas] we're going to need, so producers can plan ahead of time,” he said. “What actually happens with natural gas prices though already … is that there are important portions of demand that can't be regularly predicted ... and that can cause very high levels of price volatility.”
Weissman cautioned conference attendees that coming changes in the export market and consumption from gas generators could create conditions for intense price spikes in the near future. And as that gas consumption increases, his brother — Steve Weissman of the Center for Sustainable Energy — warned that expanded use of the resource could push the U.S. over its two-degree carbon budget.
Volatility on the horizon
Even given the explosive growth of natural gas production in this decade, EBW’s Weissman said "we’re still at an early stage of the unprecedented growth in natural gas produced in the U.S.”
“We're likely to see at least a 20 bcf/day increase over the period of the next few years — it could be greater — triggered by increases across the board,” he said. “A lot of it is baked in with new combined cycle [gas generation] units being built right now and ... pipeline exports to Mexico, but perhaps the most important part is we are starting to see explosive growth in U.S. LNG export capability.”
There are more than $40 billion in new LNG export facilities currently being built, Weissman said — a stark contrast to a decade ago, when U.S. gas companies were configuring import terminals to bring in the resource from abroad.
While questions remain about how many facilities will be completed and what their utilization rates will be, “there's no question that there will be a tremendous increase in the demand for natural gas and we could see even more growth further down the line,” he added.
That could pose a problem for generators and gas utilities alike. Already, Weissman said, natural gas is prone to price volatility because it is expensive to store and most storage facilities exist to smooth out seasonal shifts in demand. Because winter demand for gas is difficult to predict — mostly contingent on weather — it’s easy for demand to outpace local supplies and lead to higher prices.
U.S. gas production is among the most nimble drilling industries in the world, but even it would take “the better part of a year” before it could respond to tight winter supplies with enhanced production, “so you may for a period of many months have sharp price spikes.”
The coming increases in gas demand driven by LNG exports could “multiply this volatility several-fold,” Weissman said.
Just two years from now, Weissman said NARUC could be holding panel discussions about “the severe price spikes in 2019” due to high demand for LNG and a cold winter worldwide.
While it’s just a hypothetical scenario, Weissman said you could see a situation where the primacy of U.S. LNG would mean that during periods of high domestic demand, “the local distribution utilities would have to bid against national energy companies around the world for scarce supply, driving up prices.”
Exacerbating the issue is the continued difficulty in siting natural gas infrastructure — particularly pipelines, which are stalled in New England due to citizen opposition — and the need for more gas storage, Weissman said.
“We do not have a plan to build all the natural gas pipeline infrastructure we’re going to need for the market to function typically by later in this decade,” he said, “and that could lead to price spikes and regional variations in gas prices.”
The climate question
EBW’s Weissman said gas can “play a major role” in moving to a deeply decarbonized grid, along with renewables, nuclear and other resources. But his brother, a senior policy advisor for the Center for Sustainable Energy and a former Administrative Law Judge for the California PUC, warned that the coming increase in gas demand could scuttle those climate efforts.
No one has pinpointed a time when they expect natural gas demand to begin to decrease, CSE’s Weissman said, and the continued build-out of gas infrastructure to meet it could mean more economic and political pressure to keep gas use rising.
“The history of the U.S. does not support the notion that as we move toward renewable energy that we're naturally going to put fossil fuels in the rearview,” he said. “We have to be more affirmative about how we're going to get to that point if that's where we're going to go.”
The problem is that while gas has contributed to carbon mitigation to date, it is still an emitting resource. And if the U.S. wants to move to a deeply decarbonized grid, gas will soon become an impediment, rather than a facilitator to that goal, assuming its carbon is not captured.
Using EIA estimates for gas demand out to 2050 — which tend to be conservative — Weissman said the resource could account for the U.S.’s entire carbon budget.
Assuming the U.S. wants to hit an economywide decarbonization target of 80% by 2050, “the question is what would that level of gas consumption do in terms of meeting a share of the overall budget of GHG emissions in 2050,” Weissman said. “The answer is — just from smokestack emissions alone, natural gas would take all of the available GHG emissions. Nothing left for agriculture, transportation or anything else.”
There are already some researchers who think we’ve already hit the point where gas could inhibit decarbonization. Writing in the journal Applied Energy last year, Oxford researchers said that due to the long life of fossil fuel assets, “no new investment in fossil electricity infrastructure (without carbon capture) is feasible from 2017 at the latest” if we are to hit the targets of the Paris climate accord.
Weissman said the situation may be even more dire. While most studies assume a 25 to 30 year life for natural gas assets, many plants on the system today “are far in excess of that age in terms of operation.”
He said his team looked at the lifespan of natural gas plants in California, trying to ascertain how long a typical generator could stay online.
“The question was if someone was to step forward today and say to you we're thinking of building a natural gas plant, what should you have in mind in terms of how long there's going to be economic and political pressure to keep that plant operating?” he said. “What we found was that if combined cycle units of the future are behaving in the same way that these plants have historically behaved, you should expect that … even in the best of circumstances … you can expect that plant to be operating beyond 2050.”
That’s bad news for the climate, Wiessman said, and regulators should take those implications into account when they evaluate siting for new natural gas infrastructure. “Even if that's all you do, having that [perspective] available and to reflect on that as you make new infrastructure decisions and new rate setting decisions should help ... increase the extent to which we move from just hoping the market is going to take care of natural gas for us and start to more directly plan.”
Not all the attendees at the NARUC gas panel were keen to heed Weissman’s call for a planned drawdown in natural gas consumption. Maine PUC Commissioner Bruce Williamson argued that market forces are responsible for the current boom in gas production and clean energy. “God help us” if regulators try to plan the transition, he said, triggering applause around the room.
Weissman replied that while markets sparked the gas boom, relying on them to guide the rest of the transition will mean “it's pretty likely we're going to continue to use fossil fuels.”
“I think what's going to happen is the more go about renewables, for instance, the lower the price is going to be for fossil fuels,” he said. “There's going to continue to seem to be an economic imperative to continue to use fossil fuels because we will be concerned that if we don’t, we will drive up the price of electricity, for instance, unnecessarily. So, yes, I think the planning is a way to break this pattern that we've been seeing.”
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