Commodities: An American story
The shale revolution has taken the price of natural gas, a relatively clean fossil fuel, from $13/mbtu to $2/mbtu. How can it fail to challenge renewable energy? Nina Röhrbein reports
The technological advances that have made shale gas deposits accessible have revolutionised the US energy industry, turning the country from a net importer to a self-sufficient nation. Just as importantly, the ‘wet gas' that results from shale drilling has boosted US crude oil production. What might the arrival of this cheap fossil fuel mean for renewable energy sources?
In the outlook for the renewables sector, pricing is a crucial factor. Following a warm winter, US gas storage levels are high, pushing prices to a low of $2/mbtu earlier this year. With various emissions legislation coming into force in the near future, a lot of coal-powered plants are set to close in the US, to be replaced by gas-powered facilities. Together with more engines switching from oil to gas, this will balance out supply and demand. But while $2/mbtu might be unsustainable long-term, the consensus suggests a still-modest price of $5-6/mbtu, leading to speculation that some US states may readjust their renewable energy targets and push for the deployment of more natural gas.
"The overall macroeconomic situation hampered the deployment of renewables over the past years," says Thiemo Lang, senior portfolio manager of the Smart Energy fund at Swiss-based SAM. "The US did not incur a big increase in power consumption. The renewable portfolio standards in certain states force utilities to annually increase the share of renewables - the demand push was not a result of overall increase in customer electricity demand."
Lee Clements, investment manager at Impax Asset Management, suggests that a recovery in US manufacturing could act as a stabilising mechanism to the gas price and higher deployment of renewables. "But, in the near term and current economic climate, a low gas price means relatively small amounts of capital going to renewable energy."
The low gas price has meant US grid parity for solar has moved further away. But Seb Beloe, partner and head of sustainability research, at WHEB Asset Management, argues that renewable deployment in the US will still be driven by long-term energy policy, and in some cases solar might still make sense - for example, where it is difficult for gas to be connected.
Clements agrees, pointing out that, after relatively weak US wind installation during 2011, he expects 8-10 gigawatt of installations in 2012, as people take advantage of tax credits before they expire. "Unless tax credits are extended, we will see relatively light installation in future years," he says. "Solar is relatively strong because its tax credits extend to 2016 and solar panel prices have fallen sharply. In short, it is not all driven by the price of gas but the development of shale gas makes it more challenging to get to grid parity."
Lang emphasises the importance of reducing the costs of renewables each year. "The prices of solar modules have come down from $4 per watt in mid-2008 to $0.90 per watt now," he observes. "This enables us to produce solar-generated electricity at $0.12/kWh, or below, in sunny regions."
The pursuit of shale gas could have a positive impact on the renewables sector. "Looking ahead to the energy and emissions targets of 2020 and 2030, it is important to note that a gas base load generation infrastructure is relatively good for renewables," says Clements.
Coal-fired power stations tend to need to be in constant operation, which is challenging when coal and intermittent renewable energy sources such as wind and solar are combined and could result in excess electrical power in the grid.
"Natural gas is the perfect counter-player to intermittent renewable energy sources because gas-fired power stations can be switched on and off easily, and be deployed in a decentralised manner," explains Lang. "In Europe, all the net capacity additions for electricity generation over the last 10 years have come from natural gas or renewables. All the other electricity generating possibilities such as coal, oil and nuclear have seen a net decommissioning."
But while there is shale gas potential in China and some parts of Europe, those regions are unlikely to replicate the perfect storm that allowed shale to explode in the US. China's fractured and deeper geology, a lack of open access gas pipelines and a government-controlled wellhead gas price of around $4/mbtu is putting the brakes on the domestic shale industry. In Europe, gas supply mainly stems from Norway, Russia and the UK, priced at around $13/mbtu. The trend away from nuclear in Germany and Japan and the need for new infrastructure in Europe is supporting prices too. But because of Europe's higher population density these prices are not spurring a shale gas revolution, but rather improving the climate for renewables - despite the cuts to feed-in tariffs in recession-hit countries such as Spain.
"In theory, the potential global amount of shale gas could destroy gas prices," says Colin Campbell, partner at clean technology investment firm Zouk Capital. "In reality, I do not see that happening any time soon in Europe. There are other reasons why gas prices might come down but that has probably more to do with de-linking gas contracts from oil prices."
Shale gas is predominantly a US story, agrees Adrian Reed, head of energy, waste and renewables at Altium Capital. "It is not going to be a magic panacea to Europe's energy needs," he says. "Likewise, it is not going to be pushed onto the backburner but will be part of an energy mix. While renewables currently come with an additional cost, without them we would not have enough capacity to keep the lights on."
Despite the wind continuing to blow favourably for renewables in Europe, investors still have a major allocation to mature and highly liquid large oil and gas companies. They can also invest in high-growth, higher risk exploration companies, but it is difficult to invest in renewables at scale. Most of the large-scale investment in renewables is through infrastructure funds.
"Historically, we have had a high exposure to upstream solar mains, while we have always been cautious on wind turbine manufacturers," says Lang. "Given the structural issues we see right now in the solar sector - oversupply and price pressures - we prefer to stay on the sidelines. We currently only hold the US solar micro-inverter company Enphase. Instead, our exposure to the renewable power generation sector occurs through wind farm and hydro station operators, as these companies generate steady cashflows and pay dividends."
Across all of Impax' funds, the current allocation to renewables amounts to 5-12%, although the asset manager is considering when is right to return to the sector. The same goes for WHEB AM, which only holds one renewable energy company - an energy-from-waste company - in its portfolio. "At the moment we are concerned about the outlook for renewable energy as an investment," says Beloe.
As investors remain on the fence on renewables, natural gas holdings are frequently part of clean-energy funds. SAM's Smart Energy fund is one example of not only investing in renewable energies, but also energy transmission and storage, energy efficiency, natural gas exploration and production as well as gas utilities. But the number of fund specialists in shale gas exploration and production remains small and their year-to-date performance has suffered on the back of falling gas prices.
"If you think renewables are a bit too racy, then shale gas is racier," says Campbell. "There are investors for whom shale gas clearly makes sense but it is a risk-return for them. Most investors who get involved on the infrastructure side want to know what their returns are going to be, which they will not get with shale gas."
Gas is being talked about as a bridging fuel between traditional energy and renwables, but, as Beloe observes, gas plants have a 20-year lifespan during which investors are locked into still high carbon emissions - unless expensive carbon capture and storage facilities are installed.
"Gas is presented as a better solution than coal but it diverts resources from renewables and from investing in a grid that can deal with intermittent power sources," he says. "For those reasons, it is a dangerous technology. It distracts us, even though we might get some initial benefit from a move away from coal."