Week Ending April 24, 2020

Will Oil Market Chaos Hasten or Hinder Natural Gas as Bridge Fuel?

This Article Appears as Published in Foster Report No 3296
Will Oil Market Chaos Hasten or Hinder Natural Gas as Bridge Fuel?

The debate over natural gas as a bridge fuel to cleaner energy resources is receiving increased attention after the global oil market has been in turmoil, with views that differ based on who is addressing the question.

Among those embracing the bridge are gas industry representatives who refer to the intermittent nature of wind and solar power projects, global use of LNG to back out use of dirtier fuels – justifying construction of pipelines serving U.S. LNG export facilities – tax credit uncertainty for renewable power projects, and a reasonable policy approach of not relying on only a few resources in the power generation portfolio of utilities.

On the other side of the debate, advocates for ending construction of natural gas infrastructure point to lower renewable energy project costs, state decarbonization plans and investor concerns about stranded costs associated with long-term investments in pipelines and gas projects. Those points were included in an April 16 webcast on a report written jointly by clean energy firm Energy Innovation and shareholder advocacy group As You Sow.

The investor concerns were presented by Stephen Byrd of Morgan Stanley, who said his firm is tracking significant legal challenges to pipelines such as the Atlantic Coast Pipeline (ACP) planned by Dominion Energy and Duke Energy. Morgan Stanley is predicting that ACP will not be completed because it believes the revised biological opinion from the U.S. Fish and Wildlife Service will be rejected by the courts again.

“We have written off that investment entirely,” which is a major hit to investors in Dominion and Duke, Byrd said during the webcast.

Besides the legal hurdles for gas projects, the economics are making gas project investments more risky and subject to being stranded costs as economies turn away from fossil fuels, other speakers said. Clean energy projects and energy storage technologies to address the intermittency of wind and solar power are coming down in costs, while gas infrastructure costs are mature and less likely to change much, said Mike O’Boyle, director of energy policy at Energy Innovation.

At a different webcast on renewable power project investments April 21, speakers noted there are factors associated with the COVID-19 pandemic that can hinder growth in wind and solar project development. Manufacturing of components in a few spots has been halted and construction of new wind and solar projects has been disrupted, said Ethan Zindler, head of Americas at Bloomberg New Energy Finance.

All segments of the energy sector are feeling the effects of rock-bottom oil prices, reduced demand tied to the COVID-19 crisis and the skittishness of investors in the current conditions, other speakers said. About the only thing everyone agreed upon in the different forums is that the future is very uncertain and predictions about the next few weeks or months are subject to revisions as the dual health and economic crises play out. The duration of the disruption could affect how natural gas projects and clean energy investments compete against each other as the oil market staggers from one development to the next, speakers said.

Besides the natural gas as a bridge fuel discussion and a clean energy investment webcast held by the American Council on Renewable Energy (ACORE), analysts spoke at an April 21 online forum held by the Center on Global Energy Policy at Columbia University.

The record low oil prices have made a price on carbon more attractive to those looking to move global economies to cleaner resources, asserted Jason Bordoff, founding director of the Center on Global Energy Policy and a former White House official in the Obama administration.

In the U.S., with unemployment soaring and policymakers in Congress unlikely to agree on a carbon tax, such prospects have almost no chance for passage, said Christof Ruhl, senior research scholar at the Center on Global Energy Policy. Greenhouse gas emissions are coming down on the 50th anniversary of Earth Day, but that is a reflection of the economic and health crises and not consumer-driven efforts, Bordoff acknowledged.

The developments have put some ideas that were considered unthinkable only a few weeks ago back on the table, Bordoff and others said. What might have seemed extraordinary, such as the Trump administration making funds available to aid the energy sector or states stepping in to limit production rather than relying on market forces are now ripe for consideration, said Bordoff.

Illustrating his point as if on cue, the Oklahoma Corporation Commission on April 22 voted to allow producers to halt production as needed to prevent economic waste in the current price environment. That action was in response to a producer request and Commissioner Dana Murphy said the step was needed to give producers “the freedom and flexibility they need to respond to market forces and decide what actions to take to survive.”

With President Donald Trump vowing to support the U.S. oil and natural gas sector, a group of senators have asked the administration to follow through on that promise by making loans accessible to domestic producers. Sen. Kevin Cramer (R-N.D.) led the effort in a letter to Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell signed by 10 other Republican senators, including Sen. Lisa Murkowski of Alaska, who chairs the Senate Energy and Natural Resources Committee.

The confluence of events seems to change daily. As oil prices went into negative territory in the U.S. for a brief period and other states are considering limiting production, forecasts for U.S. oil and natural gas production have been lowered and further changes may take place as the OPEC+ production cuts start in May. After the one-day excursion into negative territory tied to the expiration of May futures contracts, oil prices in the U.S. are below $20/barrel, driving producers to trim budgets and endure serious job cuts and economic pain, while Middle East nations with large sovereign wealth funds and lower production costs weather the storm, with different prospects for success, said Ruhl.

Some countries have diversified their economies away from oil and have low break-even costs on oil production, such as Qatar and Kuwait, while others have sovereign wealth holdings that are small and face significant pressure if current prices last long, said Robin Mills, CEO of consulting firm Qamar Energy. Saudi Arabia is in between those two extremes, with significant wealth holdings to buffer the economic impact for a few years, but it is facing political pressure besides the cost effects, Mills said.

Global natural gas markets have some LNG contracts tied to the price of oil and there could be a gain in gas demand from countries moving away from coal-fired power generation, added Erin Blanton, senior research scholar at the Center on Global Energy Policy. The oversupply of LNG could carry into 2021 but there may be a few positive signs for gas demand to rebound, she said.

Liquefaction facilities at U.S. LNG export terminals are really expensive to operate at less than full utilization, and thus far any stoppages have been for maintenance or temporary measures, Blanton said. LNG exports are still less than 10% of the overall gas supply market in the U.S., so any gas production cuts in the current environment are not expected to affect LNG supplies in the short term, she said.

Coming out of the previous recession in 2008 and 2009, economic stimulus spending in the U.S. poured a lot of money into clean energy projects, Zindler noted during the ACORE event. That hasn’t been the case in the economic relief spending authorized by Congress this year, and that may not change as long as Congress chooses not to single out certain sectors of the economy for relief, ACORE officials said. A focus on infrastructure spending could provide an opportunity for renewable power projects to benefit, however, said ACORE Chief Operating Officer Bill Parsons said.

The use of natural gas in getting to a carbon-free economy has the potential for billions of dollars in stranded costs because gas infrastructure projects have long lives, while the transition to renewable resources can be accelerated and shortened, officials with RMI and Energy Innovation said. New gas-fired power plants may be around past 2050, but many states and utilities expect to be carbon-free by then, said O’Boyle.

The levelized cost of energy from a combined-cycle gas generation unit is higher than from wind and solar projects, depending on the type of solar technology, O’Boyle said, using data from Lazard that he termed unsubsidized project costs. With wind and solar generation already the cheapest source of energy from new projects, the current costs will drop as technologies improve, O’Boyle said.

To address the intermittent nature of wind and solar, pairing battery storage with solar thermal facilities has levelized cost of energy between $126/MWh and $156/MWh, while gas-fired peaking generation units are between $150/MWh and $199/MWh.

While the investment tax credit for solar projects is being phased out a decline in technology costs is expected to outpace the effect of losing the tax credit, O’Boyle said.

For natural gas and electric utility providers focused on keeping the lights on and natural gas flowing to meet consumer needs while dealing with the effects of COVID-19, regulators and utility personnel are working through the challenges of working remotely, said Barbara Lockwood, senior vice president of public policy at Arizona Public Service Co.

There have been supply chain concerns for renewable power projects and the disruptions associated with COVID-19 are significant, Lockwood said. It will be interesting to see if there is heightened interest in clean energy as the economy recovers from the effects of the health crisis, she said.

All the speakers noted that electricity demand is down overall, with commercial and industrial customers showing the effects of reduced operations while residential use is up as stay-at-home orders remain in place. It looks like coal-fired generation is being turned down the most in the current conditions, but it is too early to say what the impact will be for different generation resources, said Chaz Teplin, manager in the electricity practice at RMI.

Similarly, Teplin deemed it premature to forecast if the COVID-19 crisis and related economic uncertainty will accelerate or slow the transition to cleaner energy resources. Job losses have occurred in fossil fuels and the clean energy space, so policymakers may have some say on how that transition takes place, he said.

At Arizona Public Service, there is a commitment to have 100% carbon-free electricity by 2050, with 65% reached by 2030 and the elimination of coal-fired power by the end of 2031. That commitment is a stretch, but the Palo Verde nuclear plant and solar resources in Arizona make it more feasible than some other utilities considering such moves, Lockwood said.

Utilities come from different starting points for the clean energy transition and “every situation is different,” Lockwood said, noting that political support in Arizona and collaboration with stakeholders has been strong points for the utility. The carbon-free nuclear generation from Palo Verde puts Arizona Public Service at 50% clean power today, and any carbon-emitting resources in the long-term plan could be combined with carbon capture, utilization and storage technologies, she said. Use of hydrogen in the natural gas utility system also could offset gas use and count towards the carbon-free goal.

Gas-fired generation is needed today to ensure reliability is maintained during the rate stretch of several days in a row in Arizona without sunshine for solar power, Lockwood said. She conceded that the utility does not know how the 100% carbon-free target will be met in the later years approaching 2050, and it is hoping that the clean energy commitment will send a signal to technology companies that innovations will be needed to meet the goal.

Picking up on Lockwood’s comment about utilities coming from different starting points, Byrd of Morgan Stanley pointed out that technology breakthroughs are not needed for some companies that are farther along the road to a carbon-free future. Xcel Energy has high penetration levels for renewable resources planned before 2030 without the need for a lot of battery storage, he said.

A few other utilities that have voluntarily committed to 100% clean energy are Avista Corp., Duke Energy, Xcel, Green Mountain Power, Idaho Power and Public Service Co. of New Mexico.

There is growing pressure from investors to have utilities embrace clean energy projects, Byrd said. The focus on environment, social and governance issues is huge and the stock prices of early adopters in the clean energy space are being traded at a premium compared with their peers, he said.

By Tom Tiernan ttiernan@fosterreport.com





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