Graph of the Day: Myth of cheap shale gas and cheap energy

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The shale boom has seen gas prices fall by nearly 90% in the US, but electricity rises have risen all the same. Hence the interest in solar.

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The conservative press – the Murdoch media in particular – has hallelujahed the fall in gas prices as a great gift to the people, in the form of cheaper electricity.

Except, this hasn’t happened.

As this graph from Deutsche Banks shows, while natural gas prices in the US have fallen 88 per cent since 2008 – from a peak of $13/mmb to as low as $US2/mmb – consumer electricity prices have actually gone the other way – rising 20 per cent. liver the same period.

deutsche natgas vs bills

 

This graph above highlights the issue. Electricity prices are more seasonal in the US – hence the ups and downs – and are an average over the country.

The graph was published by Deutsche Bank in response to speculation that the plunging oil price – and with it the falling price of natural gas – could undermine the transition to renewables in the electricity grid.

But like its conclusions about oil – that it cannot compete with solar even at $50 a barrel and its fall with will have a minimal impact on solar, Deutsche Bank notes that the fall in the price of shale gas will also have a minimum impact.

That’s because transmission and distribution make up nearly half of the average electricity bill in the US, and investment in the grid has risen four fold in recent years, and those costs past on to consumers.

“We expect that even in a scenario where fuel costs are maintained at low levels, cost recovery for hard assets (Transmission, distribution, and generation facilities) will cause consumer rates to increase over time,” the investment bank analysts write.  “At most, prolonged low fuel costs could cause overall rates to increase less quickly or fluctuate between regions of the US.”

And this means that rooftop solar, whose costs are falling, becomes more interesting. Solar is benefitting from low interest rates, improving financing environment, and rising retail rates. Commercial solar PPAs (power purchase agreements) are  being signed in the 8-9c/kWh range and Deutsche Bank analysts say they do not expect low nat gas prices to have any adverse impact on this segment.

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5 Comments
  1. brad meikle 5 years ago

    Another great piece, thanks Giles. Its amazing how consensus a view it is that cheap natural gas kills solar. The reason is the monopoly moving the electrons!

  2. Elisabeth Meehan 5 years ago

    So tired of all the lies by our government – when will they realise they have backed the wrong horse?

  3. Greg Smith 5 years ago

    The cost of other types of energy is basically immaterial. You will note that the average cost/KWH is 12-13 cents, roughly half of what it is in the rest of the world. Probably 60% of this is in distribution and transmission infrastructure. The capital cost of generation facilities is another 30%, leaving the cost of fuel at 1.5 cents/KWH.

    Thus even a halving of coal prices or gas prices would have a minimal impact on retail prices, which are very inelastic in the USA and most of the rest of the world. This fact bodes well for the future of renewables.

    Renewables are just about at grid parity in some areas of the USA as the price in areas with high insolation is around 13 cents/KWH. As costs fall for renewables grid parity will spread to other areas.

  4. Alan Baird 5 years ago

    Great white hope turns into damp squib. The realisation will slowly begin to dawn on the others sold the pup. Gas is so transient.

  5. Richard Koser 5 years ago

    Meanwhile, in Australia we’ll be paying more for gas. Now that we’re exporting gas from the east coast, we’re linked to the global market. That brings Oz prices up to the international price. Good news for CSG miners.

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