The Impact on Natural Gas Markets of

Renewable Energy Mandates

Mary Novak

Senior Vice President, WEFA, Inc.

The prospects for natural gas are very sensitive to (1) technical progress in power technology for gas and competing energy sources, (2) the producer costs of the various energy forms, and (3) the overall level of electric energy demand. Current assessments show a significant share of the expanding power market is projected to choose natural gas due to its favorable economics. However, as discovered in the analyses summarized below, this outlook for natural gas is extremely sensitive to competition from alternative energy sources. Of particular note, each of the studies singled out the increasing competition between natural gas and renewable energy. The sensitivity of these energy sources is documented over a five year period in analyses performed as part of the on-going evaluation of energy markets in the U.S. by federal agencies. Consequently, quotas or mandates for renewables will reduce the total size of the market available to competing fuels, depressing significantly the market for gas-fired generation.

Introduction

Renewable energy mandates are again under consideration. While supported by some environmentalists, there are skeptics even within this community that point to the offsetting environmental degradation that often accompanies renewable energy projects, such as disturbing large tracts of land, habitat destruction, etc. While that issue is debated on its merits, there has been a continuing interest in the prospects of renewable energy sources and their impact on fossil fuels which has been driven by environmental legislation and the signing of the 1992 international agreement to limit carbon emissions. As a result, the U.S. Department of Energy, along with other agencies, has focused attention on the economic prospects for renewable sources of energy along with its assessment of conventional fuels. WEFA, Inc. has been commissioned to review several of these analyses, and briefly summarize key findings.

Study Summaries

"Natural Gas, Is It Really the Answer?: Targeting Natural Gas in Climate Change Mitigation Policy," by Jon Kessler, Michael Shelby and Bruce Schillo of the Energy Policy Branch of the U.S. Environmental Protection Agency, and Abraham Haspel of the Office of Economic Analysis and Competition, U.S. Department of Energy, 1992.

Responding to the assertion that natural gas could be viewed as a "bridge fuel" between the fuels of today and exotic, renewable, low greenhouse gas emitting fuels of the future, the authors investigated the impact of government policies designed to stimulate gas use economy-wide.

To perform the analysis, three modeling systems were simulated under the assumption that gas prices would be 20% lower than baseline levels by 2010. The results showed a substitution of gas for coal and oil in several markets. In addition, gas was also substituted for renewable energy. The authors note,

"Worth noting, however, is the potential for the utility sector to react to [lower] gas [prices] by deferring investment in renewable energy sources. ... The impact of lower natural gas costs diminishes...renewables penetration."

"Issues in Focus: Effects of Oil and Gas Supply Technology on Natural Gas and Renewables Markets" Annual Energy Outlook 1997, Energy Information Administration, U.S. Department of Energy, November 15, 1996.

As part of the Energy Information Administration's (EIA) analysis of the uncertainty in projecting natural gas supply, an analysis was performed of a high oil and gas supply technology impact case and a low oil and gas supply technology impact case. In this analysis the variation in technological development and adaptation led to vastly different expectations for natural gas prices.

In a supplemental analysis, the EIA also investigated the impact this uncertainty in gas prices would have on the renewable energy market. In this analysis a natural gas price which is 35% below the baseline in 2010 leads to a nearly 50% reduction in renewable energy use, while in the slow oil and gas technology case a 63% increase in gas prices leads to a nearly 74% increase in renewable energy use.

"Electricity: Renewables," Annual Energy Outlook 1996, Energy Information Administration, U. S. Department of Energy, December 15, 1995.

As part of the Energy Information Administration's (EIA) analysis of the potential for fossil and renewable energy in electric power markets, an analysis was performed on the potential impact of significant differences in the cost of new power generating capital. This analysis highlighted the sensitivity of the penetration rates for new and advanced coal, gas and renewable technology. The implication of the results is that natural gas and renewables are direct competitors in the power market.

Conclusions

The prospects or natural gas are very sensitive to (1) technological progress in power technology for gas and competing energy sources, (2) the producer costs of the various energy forms, and (3) the overall level of electric energy demand. Current assessments show a significant share of the expanding power market is projected to choose natural gas due to its favorable economics. However, as discovered in the analyses summarized, this outlook for natural gas is extremely sensitive to competition from alternative energy sources. Of particular note, each of the studies singled out the increasing competition between natural gas and renewable energy.

It is important to remember that in an era of increasing competition in electric power markets, aging or uneconomic units are subject to competition from technology and/or lower priced fuels. These units will no longer be protected by regulatory statute. As a result, the economic profile for gas and renewable power development include the benefit of these energy sources replacing older, less efficient units.

As described in the studies summarized, natural gas and renewables are inextricably linked in their quest to gain the power market. The sensitivity of these energy sources is documented over a five year period in analyses performed as part of the on-going evaluation of energy markets in the U.S. by federal agencies. Consequently, quotas or mandates for renewables will reduce the total size of the market available to competing fuels, depressing significantly the market for gas-fired generation.

This page was last updated August 31, 1997.