Unconventional gas: Tipping the odds against CSP

11 November 2011

For all the talk of how the US concentrated solar power market has been suffering at the hands of cheaper photovoltaics, many US based energy analysts say one of the biggest challenges CSP, and indeed all renewables will face in coming years, will come from the natural gas sector.

Cheap gas is underming the potential for renewable energy

By Dan McCue, US correspondent

“Natural gas is crushing, literally crushing, alternative sources of energy,” says one long time watcher of the oil and gas sector. Many of his colleagues, if less colorful, certainly agree.

The consensus is among those who hold this opinion is that it will take an awful lot for that to change. The reason? The new drilling and completion technologies the gas industry has deployed are proving far more effective in bringing new reserves on than anyone would have hoped or believed.

What’s driving the price of gas right now is horizontal drilling of shale wells and hydraulic fracturing completion methods.

Given that success, many in the gas industry have taken the position that solar and wind are extremely uneconomical and likely to remain so, “for years and years,” offers John White, a research analyst with Triple Double Advisors LLC in Houston Texas. The firm manages portfolios of publicly traded oil and gas stocks, master limited partnerships and bond.

Shale gas revolution

White pointed to a recent analysis his firm compiled illustrating how dramatically the exploration and tapping of shale wells has transformed the natural gas industry in the last few years. According to that study, while there are currently about 900 rigs in use drilling for natural gas in the U.S., roughly 70 percent of them (or about 630) are dedicated to horizontal drilling.

“Basically, the state of the industry today is one in which we are using fewer rigs and producing more gas, because of the productivity of the shale wells,” White says.

“The improvement over the last five years, in horizontal drilling and hydraulic fracturing completions, has vastly improved the ability to find and produce natural gas, and this has resulted in a price level for natural gas that makes wind and solar uncompetitive,” he says.

“We see this continuing for the foreseeable future, and if anything, we think the technology will only get better,” White adds.

When pressed, many gas industry insiders point to underlying reasons for their assumptions that are familiar to those active in the renewables sector – the intermittency of PV solar and wind, and the fact the most advantageous places to tap those resources are far, not only from populations centers, but also connection points to the grid.

The other “reason” offered up among gas and oil men is perhaps a bit more chauvinistic in nature: If there was a legitimate “play” in renewables, the major oil companies would be all over them.

Instead, they say, the ExxonMobil’s and Chevrons of the world are putting a lot of resources into natural gas.

Green energy opportunities

Not so fast, say those who have thought long and hard about the prospects of CSP. To begin with, the Obama administration is continuing to press for the passage of job creation legislation that includes provisions removing many of the subsidies and tax incentives the oil and gas industry has enjoyed for years.

While the prospects of those proposals – and how much they’ll be altered or abandoned through compromise – remain unknown, they are nevertheless in play.

The other unknown relates to advocacy and politics. Many environmentalists in the US object to horizontal drilling and hydraulic fracturing on the grounds the process may threaten ground water reserves in areas where it is carried out. If President Barack Obama wins re-election next year, the environmental community will have at least four more years to try to curb the practices.

Given those realities, the question that should be asked, says Kevin Smith, CEO of Solar Reserve, is “What does a level playing field look like?”

“Right now, the costs per kilowatt hour don’t necessarily reflect the costs of producing electricity from fossil fuels,” he says. “You’ve got the environmental impacts, water use issues… with all forms of energy, you really do have to look at the [true] cost impacts and determine what’s best for society.”

According to Smith, “The US right now seems to be in more of a ‘We’ll drill ourselves out of the energy crisis’ mentality. But I’m not sure that’s the way it is going to pan out long term.”

Among those sharing that view, is Cedric Philibert, senior analyst at the International Energy Agency’s renewable energy division.

“Of course the situation [for CSP] is tougher now in the US, due to the low cost of natural gas. The competition gets more difficult for CSP in the short-run, that’s for sure,” he says. “But at the same time, there’s a real debate going on about how long the methods for exploiting shale gas will be deployed due to the environmental concerns that have been expressed.”

“It’s not going to go on forever,” he adds.

Philibert went on to say that the removal, or dramatic reduction, of oil and gas subsidies will make a “significant difference” in regard to the viability of CSP in the US marketplace, but it won’t be enough to “fill the gap” and put concentrated solar power on par with natural gas on a dollars-per-kilowatt-hour basis.

Philibert hastens to add, long-term, it doesn’t have to.

Undermining CSP's odds

“We have been saying for the past few years that we expected CSP to become competitive for peak loads by about 2020, and this was mostly based on assumptions relative to a cost decrease for CSP and very moderate assumptions relative to an increase in the cost of fossil fuels,” he says.

“Now, given the abundance and cheapness of shale gas, that time frame is probably not as accurate as it once appeared,” he continues. “All things being equal, shale gas may still be somewhere around $60 per kilowatt hour and that level probably won’t be reached by CSP in the US during the next 10 year period.”

Still, Philibert is confident a solid CSP market will begin to take shape in the US between now and then.

“We are at the very beginning of the learning curve with CSP,” he says. “We used to say that one of the advantages of the technology was that it was cheaper than PV. Today, that’s obviously not the case, but CSP still produces a very different kind of kilowatt hour of electricity because the generation can be completely disconnected from the collection of solar heat, and therefore better allocated to peak usage.”

“This is a big plus, and not only in terms of competitiveness with natural gas, but in terms of competing with PV as well, depending on location,” he says. “In California, where peak use of electricity coincides with peak sunlight, PV will likely be dominant. But in other locations, where the peak use is either earlier or later in the day, the intrinsic value of CSP storage capacity will really come into play, and much more of the US conforms to those conditions.”

Philibert also believes that after a slow start, CSP will begin to gain momentum in the US over the course of the decade, and as it does, there will increased competition within the sector, which in turn will drive the creation of new efficiencies and technologies and help to bring its price down.

“Now, we have to consider something else, and that’s the inherent flaw of doing comparisons on the basis of single technologies,” he says. “If you do that, you are doing something wrong because this does not take into account the volatility of prices, especially fuel prices.”

Philibert goes on to explain that he much prefers to look at energy markets from the perspective of the portfolio theory that is widely used in finance.

Renewables a "low risk" bet

“When it comes to one’s finances, the conventional wisdom is that you have some assets that have a high return for high risk and others that have lower returns and lower risks,” he said. “In fact, renewables are very low risk – you don’t have the potential price spikes you have with fuel, for instance – so the immediate and short term value of renewables is to hedge against fossil fuel volatility.”

When looked at from that perspective, comparing the competitive advantage between two technologies in isolation becomes irrelevant.

“You have to consider a portfolio of generating means, and when you do that, it becomes less important to bring any single technology into parity with another,” he says. “A technology may remain more expensive and still make the portfolio better. A portfolio will have a higher return, or the same return with lower risk – even if it incorporates some assets that are more expensive.

“That’s a bit counterintuitive maybe, but it has been shown to be true in the past,” Philibert adds.

To respond to this article, please write to the Editor:

Rikki Stancich: rstancich@csptoday.com