I have not written about renewable energy in recent months for a very specific reason.
That is, the market for sources such as solar, wind, and biofuel has collapsed.
There are two overarching reasons that this has occurred… and both involve price considerations.
First, while crude oil is beginning to move upward, and natural gas prices have increased by about 57% over the past three months, both fell to unusually low levels. That means the primary ally of alternative sourcing – the acceleration in the price of hydrocarbons – has been absent.
There are environmental, lifestyle, and social considerations that would benefit from non-hydrocarbon sources of energy. Taken by themselves, however, these do not have more than a marginal impact on the energy balance.
Price remains the main ingredient. Since solar and wind also have hefty implementation prices — and they do not provide cost benefits compared to gas or oil — there are few incentives to adopt these technologies. The largess of shale gas in the U.S. combined with newly affordable longer-term transitions from coal to gas are restraining a shift to alternatives.
While supporters continue to argue that the economies of scale involved in wider introduction of renewables will bring down generating costs, these alternatives will remain more expensive for some time. Government subsidies have helped. But, in the current political climate, it's hardly wise to rely upon continuing government bailouts.
Nuclear remains the cheapest way to generate electricity; however, it contains enormous development and startup expenses. It also isn't popular politically today given the post-Fukushima concerns. And while coal reserves in the U.S. remain plentiful and still constitute the energy source for nearly half of all electricity, the U.S. continues its marked movement away from its use.
That's because there are significant non-carbon emission standards being introduced that will dramatically change the economics of using coal in the production of electricity. These new requirements will substantially change the environment for power generation.
The standards require that the U.S. must cut 90% of mercury emissions by 2015, 80% of sulfurous oxides by 2018, and 52% of nitrous oxides by 2015. And this is before any stricter carbon emissions are introduced. Coal may remain a cheaper alternative in some local areas, but the days of dominant “King Coal” in electricity generation are nearing a close, at least in the United States.
The Big Shift to Natural Gas
According to my calculations from last year, new requirements will take an additional 20 GW of coal-fired electricity off line by 2020, adding to an already major shift to natural gas underway.
This is a significant development.
We already expected about 90 GW to be closed by 2020 for a host of reasons unrelated to EPA emission standards (mostly resulting from age). For each 10 GW replaced, we will need 1.2 billion cubic feet of gas a day.
Forgetting any additional generation needed to meet rising demand, if only half of the capacity removed is replaced by natural gas, the American market would eliminate almost three times the current gas surplus in storage.
Despite languishing prices, this was a reason why, at least until recently – operators were still opening new fields. They know a big boost in demand for power generation is coming.
Now we should expect some of this need could be handled by renewables. There are some large solar and wind projects underway, especially in Arizona (solar) and Texas (wind). Yet they are still coming in as less cost effective than low-price, widely available gas projects. In addition, they will have an even greater problem should the federal government cut renewable subsidies.
That debate is coming.
Biofuel Generation Faces Steeper Problems
The second pricing consideration comes from the other direction.
This involves the position of biofuels, particularly in ethanol. A number of biofuel sources exist, but they all suffer from a lower energy production ratio. (I will have more to say about this issue over the next few weeks, since it is becoming a primary concern in the energy sector in general).
Now they do have the advantage of being renewable, domestic, and non-fossil. But they also have two major problems. One is the energy content provided. It is considerably less than oil or gas. For example, ethanol, on average, provides only 84% of the power provided by gasoline.
Paradoxically, for places where there are hills to navigate (here in western Pennsylvania for example), increasing the usage of ethanol actually increases the need for gasoline in the mix. This defeats the entire purpose of the biofuel and creates entirely new problems with the problems it creates for the engines.
The other major problem, and the prime issue these days, is the price.
The bulk of American ethanol comes from corn. This year's corn crop may experience the worst yields in two decades. A crippling drought continues to plague major growing regions across the country. Corn prices have soared, and ethanol prices have followed.
Currently, analysts believe the corn harvest may come in another 5% below forecasts. That has translated into a 40% increase in ethanol prices, and, consequently, the closure of several plants.
American reliance on crude oil causes concern over what the Middle East may do to our energy pricing. However, renewable sources create an entirely new reliance on Mother Nature.
So, if you are wondering why I spend so much time these days talking about oil and gas, the answer is simple.
It's the price.
Of course, with indications that crude and natural gas may be moving back up, the government may once again have another serious conversation about the cost efficiency of the energy balance in the not too distant future.
However, we know that it won't happen today.
Sincerely,
Kent Moors
Oil & Energy Investor
