California’s new feed-in tariff (FIT) is creating a burgeoning market for green energy investments, but the policy has sparked a fierce battle over state authority to dictate wholesale power...
The Case Against Gas Dependence
world's natural gas reserves-about 170 tcf out of a world total of 5,300 tcf. William O'Grady of A.G. Edwards states the challenge succinctly: "Here's the problem with natural gas. There's lots of natural gas, but there are no pipelines from Kazakhstan to Los Angeles. That makes U.S. gas consumers critically dependent on U.S. production, and U.S. production is in a long-term decline that most experts do not think will reverse. We have been poking holes in the lower-48 [states] since the 1920s. The relatively easy gas-producing areas have been picked over, and what's left are tough and expensive fields like deep gas zones." 7
Daniel Yergin, an LNG proponent, has estimated that meeting anticipated natural gas infrastructure needs through 2010 requires an industry investment of more than $500 billion-double the investments made during the 1990s. 8 "The United States is making a major bet on future gas supplies-without realizing it," he notes. 9
According to the Strategic Center for Natural Gas at the National Energy Technology Laboratory (NETL), 400,000 miles of new pipelines will be required by 2015 to meet expected near-term increases in natural gas demand. 10 Such rapid growth, driven largely by the use of gas to generate electricity, will place severe strains on the industry. Along with increasing loads, the expansion of natural gas use will place new burdens on the gas storage and delivery infrastructure. In addition, building new pipelines is an expensive, lengthy undertaking that generates intense local opposition.
Most (80 to 90 percent) of the 350 GW of new generating capacity required over the next two decades is expected to be gas-fired. By 2020 an additional 6 Tcf of gas will be required-about 6 Bcf per day. NETL concludes that "even with favorable market conditions for natural gas technologies, there is growing concern that demand could outstrip supply. 11 Legitimate concerns exist about the adequacy of the pipeline system not only for interstate transportation, but also for regional and local distribution." 12
NETL doubts that technologies will be developed in time to produce new sources of natural gas economically. Investment in R&D by major energy producers is declining, since a competitive energy market has forced the industry to streamline operations and reduce R&D. 13
Increased Price Volatility
In addition to concerns about future supplies, price volatility is a major problem with using gas to generate electricity. Annual average prices of natural gas to electric utilities have been extremely volatile, and price fluctuations of 50 to 100 percent have been common. Monthly gas price variations to electric utilities have been even more extreme. In recent years, the monthly price of natural gas has varied by more than 300 percent.
Natural gas prices are likely to remain extremely volatile during the next two decades. This volatility likely will worsen, given the increased demand for natural gas (especially for electricity generation) and tightening supplies. Even more seriously, this volatility will be occurring along a trend line of increasing gas prices. EIA forecasts that natural gas prices will increase as technology fails to offset resource depletion and increased demand, and