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Age of renewables: Why shale gas won’t kill wind or solar

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The emergence of the shale gas boom in the United States, and the discovery of significant reserves in Australia and elsewhere, has prompted many people in the energy industry to proclaim a “golden age” of gas, one that will cause the premature demise of renewable energy sources, even before they have a chance of creating an energy revolution of their own.

The claims have, of course, been heavily promoted by the gas industry itself, as well as from institutions such as the International Energy Agency and the US Energy Information Administration, who have both suggested the boom in shale gas will defer investment away from wind and solar.

But in a recent report, the energy analysts at international investment bank Citigroup question these assumptions, which are based on the idea that gas and renewables will compete with each other. “We suggest the opposite is true,” Citi writes.

Rather than replacing renewables, the Citi analysts suggest that the shale gas industry will actually be dependent on the broader deployment of wind and solar for its future. That’s because gas will be priced out of the conventional market in the short term, but will then be required to fill in the gaps as wind and solar are deployed more widely, and coal generation is shut down.

Far from competing with each other, Citi suggests renewables and shale gas will be co-dependent as the world’s energy systems are weaned away from the baseload model that has dominated the industry for the last century. That is until forms of dispatchable renewable energy, such as solar thermal with storage, and technologies such as smart grids, push gas out of the market.

The key to Citi’s prediction is the conclusion that the cost of exploiting shale gas is highly uncertain, as are its long-term environmental credentials. Shale gas is likely to be considerably more expensive than it has been in the US, and by the time it is exploited it will be unable to compete with the cost of renewables in most markets.

“The perception of renewables as an expensive source of electricity is largely obsolete, given the huge cost reductions achieved in recent years,” the Citi analysts write. The report notes residential solar PV has already reached ‘grid parity’ in many countries, with much of the world set to follow by 2020.

It also says that utility-scale renewables will also be competitive with gas-fired power in the “short to medium” term. This has already occurred with wind energy in many countries. The exact ‘crossover’ points for utility-scale solar will vary from country to country, but in many regions, the Citi analysts say that big solar will be competitive by 2020.

In areas such as Saudi Arabia, it suggests, utility-scale solar is already cheaper than gas at a price of $15/MMBtu. Even at a price of $8MMBtu, solar will be cheaper than gas by 2020.

“Utility-scale solar is rapidly approaching parity with wholesale electricity prices in a number of countries, including Italy, Spain, the US and China,” Citi says.

“By 2020, we calculate that utility-scale solar will be competitive with gas-fired power for a broad range of natural gas prices. “Under the optimistic assumption that the gas price reaches around $16/MMBtu, utility-scale solar would be cheaper than gas-fired power in all key markets around the world, including the UK, Russia and Germany.”

Even in the US, utility-scale solar located in the south-west of the country would be competitive with gas-fired power at all gas prices over $6-8/MMBtu, depending on whether solar prices fall according to its ‘single-speed’ or ‘three-speed’ scenarios.

Wind is also cheaper than gas-fired power in the US at a natural gas price of  around $6/MMBtu, although it does depend on the capacity factor of the plant. This evaluation of the competitiveness of wind and solar in the world’s biggest electricity market is crucial, because while Citi says while gas prices have been low in the US due to the shale price boom, they are unlikely to remain there – as much of the resource is uneconomic to extract at under $5/MMBtu, and some studies suggest the level to be in the $6-$8/MMBtu range.

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The assessment by the Citi energy team is significant because it is one of a number of teams from leading investment banks that have recognised the fundamental changes that are taking place in the global energy market. And all these changes are being driven by the falling cost of solar and wind, as highlighted by the likes of UBS, Macquarie Group and Deutsche Bank.

Citi notes that in the early stage of their deployment, renewables will actually require less peaking capacity provided by open cycle gas plants, a prediction that is borne out from experience in South Australia.

However, as renewable penetration grows, more peaking capacity is required as baseload generation is shut down. Those who noticed the Graph of the Day from Monday, which showed Germany’s generation profile last Sunday, may be fascinated to see Citi’s predictions of what happens when twice as much renewable generation is deployed.

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Baseload power plants are built on the economics of being, well, baseload. And many of the business models are also based on reaping the cream from higher-priced peak power – the areas of dark blue now occupied by solar. In short, such a scenario – which, in Germany, is official government policy – signals the demise of baseload power.

This “inverting effect”, as Citi describes it, is essentially turning the market upside down, as predicted by the majority of high penetration renewables scenarios.

More flexible gas-fired plants – and perhaps some coal-fired plants that manage to adapt – will be required to fill in the gaps. Since, at large penetration levels, the requirement for ‘peaking power’ rises as renewable penetration increases, gas-fired power is not only compatible with renewables, it is in many ways essential for its large-scale adoption. Forget about baseload and peaking-load scenarios, the future will be in flexible and inflexible generation.

“This makes the relationship between renewables and gas-fired power symbiotic; they each assist the other to gain a larger slice of the electricity market,” the Citi analysts note.

But it won’t be a permanent relationship. Eventually, in the “very much longer term”, the Citi analysts expect that ‘peaking’ power will eventually be supplied through renewable sources, through large-scale integrated storage, for instance, or through a continent-wide smart grid.

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  • Scott

    Yes, please show me and bring in the investors with renewals. We are waiting eagerly. After all, the fossil fuels provide energy without massive subsidies AND they provide royalties to build our schools, hospitals, and roads. I am keen to see the renewables that give is all those benefits at the same cost. Maybe based on all the renewable promotion, we will see even greater benefits and reductions in our cost of living. Yes, bring in those investors and their projects.

    • Dimitar Mirchev

      Where you are wrong is that we are all investors in renewable energy not only the big corporation.

    • FM

      Nuclear power also was invented in government labs, and the development was heavily subsidized by government (the US Navy), but it is now an important part of our electrical generation capacity.

      I think the time has come and gone when you could say that government investments in renewable were a bad idea. They have indeed been able to become competitive with fossil fuel electrical generation in many countries (not USA because of the very cheap gas).

    • 高仁 Patrick Sullivan

      You are saying? Fossil Fuels have no subsides?
      They have been subsidized and greased palms for over 100 Years. Mature Industry, Established Industry, $100/Barrel for Oil. Sure, they may help schools as a tax write off.
      Get Your Information, in the Open Market, do not expect the Big Fossils to tell You the truth. They are not the victim, You are. A victim of smoke screens by Big Fossils.

  • jd

    that’s nice dear…

    Scott, take a deep breath, then read the second section of todays “mixed greens” , the section titled “Global fossil fuel subsidies clock $2 trillion a year”. Here’s a link -

    http://reneweconomy.com.au/2013/mixed-greens-eu-talks-climate-targets-as-fossil-subsidies-hit-2tn-54198

    • Concerned

      Dear J d,there are none in Australia

      • Ron Horgan

        Dear anonymous Concerned,

        “Want of foresight, unwillingness to act when action would be simple and effective, lack of clear thinking, confusion of counsel until the emergency comes, until self preservation strikes its jarring gong—
        these are the features which constitute the endless repetition of history.
        Winston Churchill”

        These days we must add trolls, who for undisclosed reasons spread confusion and misdirection.

        • Concerned

          Ron please detail the subsidies pertaining to fossil fuel subsidies,and in particular coal powered generation.
          And no misinformation or groupthink please.

          • Ron Horgan

            Dear anonymous Concerned,

            A quick trip down Google lane shows lots of solid references including Federal Govt documents.

            Is consensus “group think ” in your world

        • Miles Harding

          Ron,
          Winston Churchill summed it very well, I agree with the trolls making complex issues all the more confusing.

          Something that is rarely mentioned are the steep production decline rates associated with shale gas and tight oil wells. These seem to be almost completely ignored by typical optimistic projections, as is the range of deposit quality. I would assume that the best gas prospects are the ones currently being produced, with smaller and more difficult ones to come. This does not make me confident that the actual shale gas boom will be anywhere near as big as the projections would indicate.

          According to this story:
          http://www.huffingtonpost.com/steve-horn/reports-shale-gas-bubble-_b_2718354.html
          :
          “Roughly 7200 new gas wells need to be drilled annually at a cost of approximately $42B to simply maintain the current rate of production.”

          This does not point to the shale gas boom being sustainable for more than a few years.

          • Concerned

            Ron,I am looking for properly referenced documents.Most sources are biased,and there are no references from the Federal Govt.
            Coal powered generation is not subsidised.
            I believe groupthink is the word.
            IEA cannot find such subsidies in Australia.

      • TB

        Hi Concerned,

        You ask for detail on “the subsidies pertaining to fossil fuel subsidies, and in particular coal powered generation,” with reference to Australia.

        Australia’s Coal Subsidies for 2012 cost the nation roughly $5.28 billion (US Dollars)

        I got this number from the IMF report “Reforming Energy Subsidies” (March 27, 2013, link below):
        Australia Pre-Tax Subsidies, Coal: 0.01% annual government revenues (<0.00% GDP)
        Australia Post-Tax Subsidies, Coal: 1.71% annual government revenues (0.55% GDP)

        According to the CIA World Factbook (https://www.cia.gov/library/publications/the-world-factbook/geos/as.html) Australia's 2012 GDP was roughly $960.7 billion (US Dollars). So 0.55% times $960.7 gives roughly $5.28 billion as the total coal subsidy for 2012.

        If you have a few minutes and are interested, browse the IMF's summary of its "Reforming Energy Subsidies" report here:
        http://www.imf.org/external/np/fad/subsidies/index.htm

        They explain "pre-tax subsidies" (where there's an explicit discount in the cost of energy) versus "tax subsidies" (where energy is either taxed less than other products, or where measurable externalities, like the cost of healthcare directly caused by coal powered generation, are not included in the price – and thus paid for indirectly by income taxes or national debt for example). "Post-tax subsidies" is simply the total of pre-tax added to tax subsidies.

        You can read the IMF's full report, including the data I quoted above (from pages 52 and 57), here:
        http://www.imf.org/external/np/pp/eng/2013/012813.pdf

        Best,
        TB.

      • Ben

        Actually, Australia provides something like 10bn a year in fossil fuel and mining subsidies.

  • http://pragmatusj.blogspot.com.au/ John D

    Solar thermal with molten salt heat storage and a small amount of biofuel fired back-up salt heating provides a very reliable source of both peaking and baseload power. If we are aiming for 100% renewables why waste money on gas fired if we can acheive the same thing with solar thermal?

  • Ron Horgan

    The ABC 4 corners program “Gas Leak ” on Monday night will detail how the Queensland development of gas wells was done BEFORE proper information was available.
    Commercial pressure seems to have been a driving force in obtaining such permits.
    The result may damage the long term value of this prime agricultural land for the quick profits of gas extraction.
    Its Catch 22. They will do anything to you that let them do!

  • Louise

    Hopefully the invention to make hydrogen at a much lower cost is going to materialise in an actual product next year.
    It would further undermine the viability of fossil fuel and switch more people to use renewable clean energy.

    “Curtis Berlinguette and Simon Trudel have invented an environmentally friendly, highly customizable way to make a key component in a process that stores electricity by turning water into hydrogen fuel — at a price they say is roughly 1,000 times cheaper than current methods for making that component.”

    “According to the University of Calgary, FireWater Fuel Corp. plans to have a commercial electrolyzer available by 2014 and a home version on the market a year later.”

    http://www.cbc.ca/news/technology/story/2013/03/29/technology-water-electrolysis-calalyst-calgary.html

    • Ron Horgan

      Hi Louise, Its the catalyst that is 1000 times cheaper not the cost of producing electrolytic hydrogen.
      However they claim that hydrogen costs can be reduced to lower than conventional electrolytic methods by using these new methods.
      The device has to be coupled with a supply of low cost electricity to store energy when it is not needed for immediate use.

  • adam

    Quote from article:

    The key to Citi’s prediction is the conclusion that the cost of exploiting shale gas is highly uncertain, as are its long-term environmental credentials. Shale gas is likely to be considerably more expensive than it has been in the US…

    End quote

    –any more info on this? Happy for links. Even on the proven costs of US shale gas. The article is heavy on the wonders of renewables but I want more info on costs/risks of unconventional gas for comparison.

  • Craig Morris (@PPchef)

    Giles, where is this report? What is its title? Why don’t you provide a link?

    I had the same problem with the Deutsche Bank study. Everyone wrote about it, but no one provided a link.

    Did anyone actually read these studies, or are we just copying from each other?