Are Natural Gas and Renewable Energy competitors? Or complementers?

Natural gas proponents have a tendency to bash solar and wind generated electricity. Both solar and wind are intermittent sources of electricity they argue. Short term weather patterns as well as seasonal variations in temperature and precipitation can create havoc in predicting output from either solar or wind farms.  And neither solution is good at handling peak demand, those times when utilities need extra short term capacity to meet demand.

1 And low natural gas prices over the past few years have accelerated the use of natural gas for new utility capacity.  Nearly 90% of new electricity capacity in the western United States is planned to be natural gas fired electricity generation in the next decade, in spite of this area being one of the best areas in the world for both solar and wind energy.

With the big boost in U.S. natural-gas output from new horizontal fracturing technology, some experts concluded that solar and wind energy would be battered by this cleaner, less expensive fuel.  Indeed both markets have experienced a slowdown at the utility scale level of development.

I believe this is a reflection of the near term economy and the fluctuating uncertainty around Federal and State tax credits and benefits for solar and wind. For the long term, we predict gas and renewables will coexist in more and more utilities’ portfolios.The recent data shows that both are growing.  Natural-gas electricity generation rose 34% from 2009 to 2012, starting from a much bigger base than renewables. Wind generation rose 92% in the same period and solar generation about 4X, according to the Wall Street Journal.

Natural gas plants are compact in size, can be sited in and around large cities, can be quickly permitted, and can be easily financed. Output can be easily turned up or down to meet demand. However, building these facilities means the utilities are now at risk for long term natural gas prices. Yes the prices are low today. But what will the price be in one year? Five? Ten? Regulators know consumers and businesses are notoriously aware of price increases for electricity, so it can be hard for utilities to recover increased costs at the time they incur.

Over the longer term, volatile gas prices and new environmental controls add up to a big risk for utilities.  How to hedge this risk? Utilities can resort to price hedging their fuel cost, just as airlines may hedge jet fuel prices. But that may not stop a steady rise in fuel costs over time.

A different hedge is to build a balanced portfolio of electricity capacity that includes wind farms and solar projects. Almost all of the costs for these renewables are upfront and predictable. The future costs of electricity are much more certain than for natural gas fired plants. This alternative view of hedging makes solid business sense for utilities, especially now that the solar and wind industries have the capacity to provide meaningful gigawatts of electricity at competitive costs to natural gas over the long term.

Competitors or complementers? Expect natural gas and renewables to coexist in the utility industry for the next 20 years.