Commodities

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Over the past decade, natural gas has somehow managed to snatch defeat from the jaws of victory.

Methane demand has boomed, with consumption in 2016 running 631 million tons of oil equivalent higher than 10 years earlier -- only a little behind the growth from oil, nuclear, solar and wind put together.

Gas Bubble
Global consumption of natural gas increased between 2006 and 2016 faster than for any other form of energy
Source: BP Statistical Review, Gadfly calculations
Note: mtoe=million tons of oil equivalent.

At the same time, the industry is in a deep crisis. The market for liquefying and shipping gas will be oversupplied until 2024, according to McKinsey Energy Insights. All but a handful of projects worldwide would be losing money if they were dependent on current Asian benchmark prices of $5.908 per million British thermal units:

LNG cost curve

At first blush, renewables don't seem to help the situation. Methane can team up with wind, solar and hydro to take down their common enemy of coal in regions like the U.S. and Europe where gas is cheap. But in much of Asia it's coal that undercuts LNG on price. As a result, the rapidly falling cost of renewables is putting more pressure on gas than the black stuff.

So why is Maarten Wetselaar, Royal Dutch Shell Plc's director of integrated gas and new energies, so sanguine about the growth of wind and solar?

"We are deeply convinced that the end-point energy mix that provides cheap, or at least affordable, reliable and clean energy to everybody will consist of renewable power, biofuels, and natural gas," he told an event in Bloomberg's Sydney offices Wednesday.

Sinking Sun
In two-and-a-half years, the cost of solar generation in India has dropped 41 percent
Source: Bloomberg New Energy Finance
Note: Based on levelized costs of generation, the discounted cost of electricity over the lifetime of a new generating plant.

To understand why, it's worth thinking about how transformatively cheap renewable power is becoming. Unlike petroleum, coal and nuclear, it runs on a fuel that's essentially free. Furthermore, its basic unit isn't a giant one-time construction project like a thermal power plant, but a manufactured object like a turbine or a solar module that gets cheaper as volumes rise and production costs are squeezed. Think of what's happened to PC prices since the 1980s.

That helps explain why solar and wind are now the cheapest forms of new generation in Australia, and why the cost of solar has fallen more than 40 percent in India in two-and-a-half years, to the point where project bids now routinely come in below the price of coal equivalents :

It's a dramatic shift in the cost structure of energy, but critics are right about one drawback of renewables: their vulnerability to sudden drops in output when the wind dies or clouds block the sun.

That's where gas comes in.

There are two paths to dealing with the world being created by renewables. One, favored by many coal advocates, is to falsely equate reliability with baseload, always-on generation like coal and nuclear. Reliability is the attribute that variable wind and solar lack.

Insisting that baseload is the only way to provide reliability is a way for incumbent players to protect themselves from disruptive rivals. 

Renewal Notice
Solar and wind are now the cheapest forms of new generation in Australia
Source: Bloomberg New Energy Finance
Note: Based on levelized costs, the discounted cost of producing electricity over the lifetime of a generating plant.

A better approach would be to recognize that other generation technologies are more nimble providers of reliability, and when partnered with renewables can provide a lower-cost solution.

Gas is unusually well suited for such a future. In the first seconds after wind and solar output falls on a change in the weather, rechargeable batteries might be best placed to provide instant electrons. After that, though, pumped-storage dams and then peaking gas turbines will be able to provide less costly generation for hours until variable renewable generation recovers. Coal plants tend to be too slow to gear up and down to be suitable for such unpredictable events.

Peak Gas
Open-cycle gas peaking plants make up all but a fraction of the planned non-renewable generation capacity in Australia
Source: Australian Energy Market Operator
Note: Based on committed and proposed capacity less withdrawn and announced withdrawal capacity.

While regulators wrangle over which path to take, the industry is voting with its feet. Shell is looking at building renewable generation plants in Australia equipped with back-up gas supply, Wetselaar said, adding to plans for similar facilities in Oman and Brunei. In Australia, open-cycle gas turbines -- the sort mostly used to cover peak demand -- make up the largest share of the industry's planned capacity additions after wind and solar. 

Gas is still a fossil fuel, so its future isn't eternal. The Intergovernmental Panel on Climate Change expects it to rise as a share of generation before peaking and starting to decline by 2050. In the meantime, though, those fearing an unending glut should be wary of treating renewables as the enemy. Wind and solar may just be their saviors.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net