Royal Dutch Shell

Nuclear and Wind Energy Blocked by Cheap Natural Gas—For Now

To say that recent energy trends both in the US and abroad have been confusing is a considerable understatement. Over the last several years, concerns over carbon emissions and government policies have led to significant investment and growth in solar, wind and nuclear. But aggressive development of domestic oil and gas resources, including shale gas, tight oil, tar sands and deep offshore resources, have led to a resurgence in domestic production that has tilted the energy playing field, reshuffling the pecking order in the process. Of particular significance is the widespread adaption of natural gas for electricity generation. This has left both nuclear and wind, which were previously competing successfully against coal, in a position to compete against natural gas, which has been more difficult.

 Given the falling natural gas prices, both nuclear and wind are having trouble competing. And, according to The New York Times, they’re fighting each other as well. Because there is no national, comprehensive energy policy, but rather only what the Obama administration calls an “all of the above” approach, which ends up diluting the both the effort and the investments needed. The market needs a clear signal because of the large investments involved. You can see this confusion at work also in the biofuels area, where we’ve seen a backing off of the commitment—under a lot of pressure from the oil industry, I might add. That could potentially scare away investors. 

It’s true that falling gas prices have held back renewables. Prices were even lower in 2013 than they were in 2012, which were low enough to shake things up. It’s a very dynamic market comprised of two major segments that are quite different: power generation and industrial/buildings. In the power generation world, utilities own both coal and gas plants, and have the opportunity to switch back and forth between them by flipping a switch in response to price signals. So the price of coal will drop in response to the low price of natural gas and vice versa. So much so that gas, which accounted for 40 percent of electricity generation power in 2012, fell to 35 percent in 2013, due to the decline in coal prices.

In the case of both buildings and industry, fuel selection is a question of capital infrastructure that is not so easily changed. That is why some analysts say that oil and gas companies, seeing the looming threat of renewables to their profitability, are making a deliberate effort to drive natural gas prices down as a survival tactic, hoping to induce customers to make such investments, lured by the low gas prices, thereby locking in those sales for years to come. The use of gas for industrial purposes, according to the International Energy Association, has remained high this year for exactly this reason.

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