Maybe The Good News For Natural Gas Isn’t So Good

After I read the article “Solar + Wind = 10% of US Electricity Generation in 1st Half of 2018,” by Zachary Shahan, I started slipping into a blue funk. The article showed that growth in electric generation by renewable technologies was sluggish, and natural gas was gaining use rapidly. The situation is quite the reverse of what we need to live sustainably.

I felt I had to check the figures. This was not because I thought Zach was wrong. I knew he was right. The figures he cited were the same ones provided by the Energy Information Administration (EIA) and Federal Energy Regulatory Commission (FERC).

What I was looking for was another story, hidden beneath the current data. I found it in the details. And it appears to be a clear set of evidence that things are getting worse, not better, for the natural gas industry.

Others have written about economic problems with the natural gas industry before. The natural gas industry is growing seemingly by leaps and bounds, and yet a number of people believe it is clear that something is very wrong with it.

An example came this past April, in a post by PV Magazine USA, in which Javier Cavada, the president of energy solutions at Wärtsilä, is quoted as saying, “Combined cycles have gone to half in ‘16, half in ‘17, and this year we will see if there is any crazy person going for combined cycle.” Gas, the industry that destroyed coal, is running into trouble.

Part of the problem of natural gas is competition from renewable power. A recent article from Reuters, “Buoyant gas industry may be blindsided by renewables,” speaks to the competition from inexpensive renewable energy. It is clear that the growth of natural gas may be altogether too fast to be stable. Unlike renewable energy, the prices for electric power from natural gas are unlikely to decline, making gas increasingly noncompetitive.

But another part of the problem is that the entire structure of the natural gas market is increasingly dependent on fracking. The portion of natural gas that came from fracking had risen to about two-thirds by 2015 according to the Energy Information Administration, and has undoubtedly risen higher since.

Unfortunately for gas generators, fracking is a risky business. The fracking industry, which supplies most of our natural gas, looks like it is built on extremely fragile economics. It has never made a profit with a low price for oil, but even at current prices, it has trouble competing with solar photovoltaics, wind turbines, and batteries. To make money, the price of gas has to go up to a point where it cannot compete.

What makes the position of gas even worse is that in its desperation to get financing, many companies in the fracking industry have borrowed very heavily. Now, it would seem, many companies depend on low interest rates to survive.

This brings us back to the FERC and EIA figures. A longer look at the data revealed a couple of surprising things, especially when the years of 2018 and 2017 are compared to 2016.

While it is true that electric generation from natural gas rose from 2017 to 2018, its rise was only barely better than to recover from its loss from 2016 to 2017. During 2016, coal took back a bit of the market share it had lost to natural gas. The following year, coal lost it back again, and this is where gas got its gains. Over the two-year period, natural gas barely grew at all, only increasing 0.35%. By comparison, wind power has grown over 15%, and the estimated capacity of solar power has grown over 90% over the two year period, according to FERC data.

Additions of new generating infrastructure increased the capacity of natural gas plants by 2.59% over the two years. That is somewhat sluggish growth, but when it is combined with the figures for output, it becomes clear that what is growing is not the industry, but the industry’s problems. The fact that capacity increased seven times as much as output means that natural gas has become less efficient at generating electricity, due to market conditions. Because of its market, the capacity factor of natural gas plants has declined by an amount that matches its growth fairly closely.

At a lower capacity factor, the plants have to make a bit more money on each unit of electric energy they sell to maintain profits. Unless they can get their fuel cheaper, they have to raise their prices, in the face of the reductions of price from solar, wind, and batteries. But the fracking industry can’t sell gas cheaper, because it needs to make more money because of its debts.

Dependence on fracked gas may go sufficiently beyond being problematical, however. An article in the New York Times, “The Next Financial Crisis Lurks Underground,” puts this into a broader context.

A couple of years ago, many companies in the fracking industry were put out of business by decisions by oil producing states to increase output, pushing prices down. Deeply in debt, they had not alternative but to go out of business. Fracking has recovered, and new natural gas plants are being built. But the problems seem not to have been corrected. Another round of failures could develop.

That makes fracking, now the dominant producer of gas and oil, a weak link for a natural gas industry. I suspect that natural gas is far more vulnerable than many people would like to admit. If fracking cannot supply the gas and oil, the new generators that are coming on line will not be able to run. (And for that matter, neither will the older ones.) Unable to run, they will not be able to stay afloat financially.