Why CSG won’t kill renewables

Giles Parkinson, editor, RenewEconomy

The emergence of the shale gas boom in the United States, and the discovery of significant reserves of coal seam gas in Australia and elsewhere, has prompted many people in the energy industry to proclaim a ‘golden age’ of gas, one that will cause the premature demise of renewable energy sources, even before they have a chance of creating an energy revolution of their own.

The claims have, of course, been heavily promoted by the gas industry itself, as well as from institutions such as the International Energy Agency and the US Energy Information Administration, who have both suggested the boom in shale gas will defer investment away from wind and solar.

But in a recent report, the energy analysts at international investment bank Citigroup question these assumptions, which are based on the idea that gas and renewables will compete with each other. ‘We suggest the opposite is true,’ Citi writes.

Rather than replacing renewables, the Citi analysts suggest that the shale gas industry will actually be dependent on the broader deployment of wind and solar for its future. That’s because gas will be priced out of the conventional market in the short term, but will then be required to fill in the gaps as wind and solar are deployed more widely, and coal generation is shut down.

Far from competing with each other, Citi suggests renewables and shale gas will be co-dependent as the world’s energy systems are weaned away from the baseload model that has dominated the industry for the last century. That is until forms of dispatchable renewable energy, such as solar thermal with storage, and technologies such as smart grids, push gas out of the market.

The key to Citi’s prediction is the conclusion that the cost of exploiting shale gas is highly uncertain, as are its long-term environmental credentials. Shale gas is likely to be considerably more expensive than it has been in the US, and by the time it is exploited it will be unable to compete with the cost of renewables in most markets.

‘The perception of renewables as an expensive source of electricity is largely obsolete, given the huge cost reductions achieved in recent years,’ the Citi analysts write. The report notes residential solar PV has already reached ‘grid parity’ in many countries, with much of the world set to follow by 2020.

It also says that utility-scale renewables will also be competitive with gas-fired power in the ‘short to medium’ term. This has already occurred with wind energy in many countries. The exact ‘crossover’ points for utility-scale solar will vary from country to country, but in many regions, the Citi analysts say that big solar will be competitive by 2020.

In areas such as Saudi Arabia, it suggests, utility-scale solar is already cheaper than gas at a price of $15/MMBtu. Even at a price of $8MMBtu, solar will be cheaper than gas by 2020.

‘Utility-scale solar is rapidly approaching parity with wholesale electricity prices in a number of countries, including Italy, Spain, the US and China,’ Citi says.

‘By 2020, we calculate that utility-scale solar will be competitive with gas-fired power for a broad range of natural gas prices. Under the optimistic assumption that the gas price reaches around $16/MMBtu, utility-scale solar would be cheaper than gas-fired power in all key markets around the world, including the UK, Russia and Germany.’

Even in the US, utility-scale solar located in the south-west of the country would be competitive with gas-fired power at all gas prices over $6–8/MMBtu, depending on whether solar prices fall according to its ‘single-speed’ or ‘three-speed’ scenarios.

Wind is also cheaper than gas-fired power in the US at a natural gas price of around $6/MMBtu, although it does depend on the capacity factor of the plant. This evaluation of the competitiveness of wind and solar in the world’s biggest electricity market is crucial, because while Citi says while gas prices have been low in the US due to the shale price boom, they are unlikely to remain there – as much of the resource is uneconomic to extract at under $5/MMBtu, and some studies suggest the level to be in the $6–$8/MMBtu range.

This article was first published in reneweconomy.com.au.