Why cheap natural gas is driving many plants' energy investment decisions

July 1, 2013
Peter Garforth says assess your energy strategy.

Industry loves the plentiful availability of low-cost natural gas. Alone in the world, the United States and Canada are enjoying seemingly limitless supplies of natural gas at record low prices. Where will these prices go over the next decades?

U.S. and Canadian government forecasts suggest they will stay at these lows for at least 20 years. Others see a less predictable future. This question is arguably the most important facing the majority of industrial energy managers. More broadly, cheap gas is driving major investment decisions, reshaping utilities, manufacturing, and civic infrastructure in ways that will reverberate for at least a generation.

Low gas prices are unquestionably fueling a resurgence of North American manufacturing where gas is a feedstock, most obviously agricultural chemicals. Low-cost gas makes high-energy-consuming industry more competitive and is beginning to influence decisions on reopening and locating chemical, glass, and metals manufacturing facilities in North America. Employment in construction and manufacturing immediately benefits, and lower-cost products benefit consumers.

Natural gas at today’s prices is an attractive choice for electricity generators, displacing coal at an unprecedented rate. This is not good news for a West Virginia miner, but probably outweighed by the benefits for most electricity consumers and suppliers of new generating plants.

On the environmental front, switching to gas brings benefits. Electricity from gas creates less than half the carbon-dioxide emissions that coal does. A recent report by the chief economist of the International Energy Agency, noted that carbon-dioxide emissions in the United States dropped to levels from the 1990s, mainly due to the coal-to-gas switch.

These North American price lows have other effects. The values from energy efficiency drop, deferring investments in updated plants and more efficient manufacturing processes. The world is littered with corpses of industries that relied on low material prices as their main competitive advantage.

Reduced value of efficiency puts the pressure on cities and the construction industry to slow down efficient renovation and construction of homes and buildings that collectively consume 40% of all U.S. energy and 70% of U.S. electricity. Cheap natural gas also means cheap heat, deferring or stalling decisions on heat recovery, CHP, and urban district heating and cooling systems.

Peter Garforth heads a specialist consultancy based in Toledo, Ohio and Brussels, Belgium. He advises major companies, cities, communities, property developers and policy makers on developing competitive approaches that reduce the economic and environmental impact of energy use. Peter has long been interested in energy productivity as a profitable business opportunity and has a considerable track record establishing successful businesses and programs in the US, Canada, Western and Eastern Europe, Indonesia, India, Brazil and China. Peter is a published author, has been a traveling professor at the University of Indiana at Purdue, and is well connected in the energy productivity business sector and regulatory community around the world. He can be reached at [email protected].
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Using gas as a low-cost, power-generation fuel changes the competitive relationship with wind and solar alternatives, slowing the recent rapid growth in investment and employment in alternative-energy industries. The potential lost employment in these efficiency and alternative supply markets is, by many estimates, greater than that gained through low gas prices.

The global pricing picture is interesting. In early June, the U.S. spot price for gas was $12.70 per equivalent MWh. The European and Japanese equivalents were $34.90 and $47.60, respectively. This is the background for pressure from the U.S. and Canadian natural-gas industry to increase exports. This in turn raises pressure from others to inhibit exports to protect local low prices.

The coal industry has not been sleeping. Seeing its low-cost competitive advantage disappear in the United States, it’s focusing on European and Asian markets where price is still an advantage. Last week, a German paper reported that a new gas power plant was idle and coal capacity was running. In a country aiming at an 80% strategic greenhouse gas emissions reduction, that was seen as going in a questionable direction.

The same IEA paper that reported emissions reductions in the United States noted they’d increased 7% in Japan and globally were on track for an average 5 °C warming against current efforts to contain it by 2 °C. There is a certain irony in that emission reductions in the United States. from the switch to gas may be the indirect cause of increases elsewhere. The atmosphere does not respect national borders.

Low U.S. gas prices come from the recent rapid growth of supply from shale fields using hydraulic fracturing, or fracking. To say this practice is controversial would be an understatement. On one side of the debate is the view that this is a national treasure that will bestow long-term economic and social benefits. On the other side is the view that it will irrecoverably damage water resources, destroy local communities, cause increased methane emissions, and unacceptably delay efficiency and the decarbonization energy systems.

Even in countries that would clearly benefit from lower-cost gas — Poland, France, and Germany are examples — there is a high degree of skepticism about the long-term benefits of shale gas. In others, most notably the United States, the immediate benefits are welcomed with an underlying discussion growing on the longer-term impacts. How this debate will play out in terms of cost and availability cannot easily be predicted.

In the end, we are left with the same question. Can U.S. companies and cities make major investment decisions and shape their own efficiency programs on the assumption that natural gas will be cheap forever?

Read Peter Garforth's monthly column, Energy Expert.