Bloomberg’s renewable energy affiliate forecasts that wind and solar power will make major inroads into the global market share of natural gas within a decade. This is a crucially important question for major oil companies who are betting their future on gas, writes Managing Director of independent US-based consultancy GSW Strategy Group Geoffrey Styles. But according to Styles, it is likelier that coal, not gas, faces the biggest risk from the growth of renewables.
A recent story on Bloomberg News, “What If Big Oil’s Bet on Gas Is Wrong?”, challenges the conventional wisdom that demand for natural gas will grow as it displaces coal and facilitates the growth of renewable energy sources like wind and solar power. Instead, the forecast highlighted in the article envisions gas’s global share of electricity dropping from 23% to 16% by 2040 as renewables shoot past it. So much for gas as the “bridge to the future” if that proves accurate.
Battery improvements depend on chemistry, not semiconductor electronics. Assuming their costs can continue to fall like those for solar cells looks questionable
Several points in the story leave room for doubt. For starters, this projection from Bloomberg New Energy Finance (BNEF), the renewables-focused analytical arm of Bloomberg, would leave coal with a larger share of power generation than gas in 2040, when it has renewables reaching 50%. That might make sense in the European context on which their forecast seems to be based, but it flies against the US experience of coal losing 18 points of electricity market share since 2007 (from 48.5% to 30.4%), with two-thirds of that drop picked up by gas and one-third by expanding renewables. (See chart below.)
It’s also worth noting that the US Energy Information Administration projected in February that natural gas would continue to gain market share [in the U.S., even in the absence of the EPA’s Clean Power Plan, which is being withdrawn.
Natural gas prices have had a lot to do with the diverging outcomes experienced in Europe and the US, so far. As the shale boom ramped up, average US natural gas spot prices fell from nearly $9 per million BTUs (MMBTU) in 2008 to $3 or less since 2014. Meanwhile, Europe remains tied to long-term pipeline supplies from Russia and LNG imports from North Africa and elsewhere. Wholesale gas price indexes in Europe reached $7-8 per MMBTU earlier this year.
Sunlight and breezes
But it’s not clear that the factors that have kept gas expensive in Europe and protected coal, even as nuclear power was being phased out in Germany, will persist. The US now exports more liquefied natural gas (LNG) than it imports. US LNG exports to Europe may not push out much Russian gas, but along with expanding global LNG capacity they are forcing Gazprom, Russia’s main gas producer and exporter, to become more competitive.
Then there’s the issue of flexibility versus intermittency. Wind and solar power are not flexible; without batteries or other storage they are at the mercy of daily, seasonal or random variation of sunlight and breezes, and in need of back-up from truly flexible sources. Large-scale hydroelectric capacity, which makes up 75% of today’s global renewable generation and is capable of supplying either 24×7 “baseload” electricity or ramping up and down as needed, has provided much of the back-up for wind and solar in Europe, but is unlikely to grow rapidly in the future.
Many large resource companies have increased their focus on natural gas….. If that bet turned out to be wrong, many billions of dollars of asset value would be at risk
That means the bulk of the growth in renewables that BNEF sees from now to 2040 must come from extrapolating intermittent wind and solar power from their relatively modest combined 4.5% of the global electricity mix in 2015 to a share larger than coal still holds in the US. The costs of wind and solar technologies have fallen rapidly and are expected to continue to drop, while the integration of these sources into regional power grids at scales up to 20-30% has gone better than many expected. However, without cheap electricity storage on an unprecedented scale, their further market penetration seems likely to encounter increasing headwinds as their share increases.
BNEF may be relying on the same aggressive forecast of falling battery prices that underpinned its recent projection that electric vehicles (EVs) will account for more than half of all new cars by 2040. As the Financial Times noted this week, battery improvements depend on chemistry, not semiconductor electronics. Assuming their costs can continue to fall like those for solar cells looks questionable. Nor is cost–parity a function of temporary government incentives – the only aspect of performance that will determine how well EVs compete with steadily improving conventional cars and hybrids.
If the energy transition now underway is indeed being driven by emissions and cleaner air, then it’s coal, not gas, that faces the biggest obstacles
I also compared the BNEF gas forecast to the International Energy Agency’s most recent World Energy Outlook, incorporating the national commitments in the Paris climate agreement. The IEA projected that renewables would reach 37% of global power generation by 2040, or roughly half the increase BNEF anticipates. The IEA also saw global gas demand growing by 50%, passing coal by 2040. That’s a very different outcome than the one BNEF expects.
Simple reality check
Despite my misgivings about its assumptions and conclusions, the BNEF forecast is a useful scenario for investors and energy companies to consider. With oil prices stuck in low gear and future oil demand highly uncertain, thanks to environmental regulation and electric and autonomous vehicle technologies, many large resource companies have increased their focus on natural gas. Some, like Shell and Total, invested to produce more gas than oil, predicated on gas’s expected role as the lowest-emitting fossil fuel in a decarbonizing world. If that bet turned out to be wrong, many billions of dollars of asset value would be at risk.
However, it’s hard to view that as the likeliest scenario. Consider a simple reality check: As renewable electricity generation grows to mainstream scale, it must displace something. Is that likelier to be relatively inflexible coal generation, with its high emissions of both greenhouse gases and local pollutants, or flexible, lower-emitting natural gas power generation that offers integration synergies with renewables? The US experience so far says that baseload facilities – coal and nuclear – are challenged much more by gas and renewables, than gas-fired power is by renewables plus coal.
The bottom line is that the world gets 80% of the energy we use from oil, gas and coal. Today’s renewable energy technology isn’t up to replacing all of these at the same time, without a much heavier lift from batteries than the latter seem capable of absent a real breakthrough. If the energy transition now underway is indeed being driven by emissions and cleaner air, then it’s coal, not gas, that faces the biggest obstacles.
Geoffrey Styles is an energy expert, advisor and communicator. He is Managing Director of GSW Strategy Group, LLC, an energy and environmental strategy consulting firm helping organizations and executives. His industry experience includes leadership roles in strategy development and scenario planning, alliance management, and energy trading. He has a background in alternative energy, climate policy, global refining & marketing, logistics. Follow him on Twitter @gswstrategy