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IN DEPTH: The shale-gas challenge

The renewables business has always been prone to wild fits of optimism and pessimism, but nothing has caused the same gnawing apprehension over the past few years as shale gas.

In what feels like the blink of an eye, cheap, bountiful natural gas has been controversially unlocked across swathes of the US by “fracking”

In the eyes of some, this shale gas represents an environmental catastrophe and an existential threat to renewables.

For others, it is a near-perfect complement to renewables, offering the prospect of a gentler, less economically disruptive transition to a coal-free future.

And the extent to which shale gas and renewables ultimately compete, coexist or co-operate is of profound consequence not only to future US energy policy, but around the world.

Unsurprisingly, the most immediate impact of the shale-gas boom has been on gas prices.

In 2008, spot natural-gas prices in the US averaged $8.93 per million BTU (British thermal units). Last year, the price averaged $2.77 — a decline that even renewables can’t keep up with.

“There’s no hiding the fact that it’s dramatically changed the landscape… and put tremendous pressure on renewables,” says Christopher Hunt, managing director at private-equity firm Riverstone Holdings, a major investor in both hydrocarbons and renewables.

“It’s lowered power prices in the US to the point where, frankly, I’d be surprised if you see many long-term power-purchase agreements [PPAs] signed in the next year, because the level you have to hit to meet that low gas price assumption is difficult.”

Jim Spencer, chief executive of Pittsburgh-based EverPower Wind, says low gas prices have made the economics of building large wind farms in parts of the country “very, very challenging”.

But it’s not just renewables that are struggling, Spencer notes. “Low gas prices mean that coal-fired generators can’t make any money; nor can nuclear generators; nor can gas producers, for that matter. We’re all in the same boat.”

The economic merits and environmental demerits of fracking are being debated throughout the states straddling the Marcellus Shale, which runs beneath a large slice of the Appalachia region in the Northeast.

But it is Pennsylvania that has emerged as the epicentre of the collision between shale gas and renewables.

Pennsylvania’s ties to the energy sector date back to 1859, when the first US commercial oil well was drilled at Titusville, and it has gone on to develop deep links with the coal and nuclear industries.

It established a renewable portfolio standard in 2004 — early by US standards — and has outperformed most rivals in attracting renewables manufacturers, such as Spanish wind-turbine maker Gamesa, which has two factories in the state.

The shale gas industry quietly steamrolled into sleepy, jobs-hungry corners of Pennsylvania a few years ago — led by companies such as Oklahoma-based Chesapeake Energy, and employing newly perfected drilling techniques of extraordinary technical sophistication — catching regulators, environmental groups and the media flatfooted.

In 2008 — the year the first horizontal gas well was drilled in Pennsylvania — the state produced less than 500 million cubic feet (14 million cubic metres) of natural gas per day. By early 2012, production in the state had soared to nearly 3.9 billion cubic feet a day, an uptick with staggering economic and infrastructure implications, particularly given its proximity to the populous East Coast.

As you drive through the foothills of the Allegheny Mountains in southwestern Pennsylvania, with a chilly mist filling the valleys like ethereal glaciers, EverPower’s newly commissioned Twin Ridges wind farm seems to explode onto the horizon.

“There are fracking operations in close proximity to all of our Pennsylvania wind farms,” says Spencer.

For wind developers, this means competing with exhaust-belching drilling rigs for the same narrow roads, or facing vastly inflated fees from local businesses due to the economic distortions wrought by the fracking boom. It can also complicate relationships with local communities.

“When we first started approaching landowners, they were suspicious of us, which is a function of them feeling they weren’t dealt with fairly by traditional oil and gas companies” in past decades, Spencer says. “Now we’re in these communities, and fracking starts up.”

Another serious threat from shale gas is on the political front, and here again Pennsylvania holds useful, if worrying signs.

Much of the state’s clean-energy momentum is down to Ed Rendell, who served as Democratic governor from 2003-11. His Republican successor Tom Corbett has made no secret of his love for the natural gas industry — and it for him.

Last November, when a handful of Republican governors signed a letter urging Congress to extend the production tax credit for wind energy, Corbett’s signature was notably absent, despite Gamesa having furloughed hundreds of workers only months earlier due to the looming expiration.

In Corbett’s political calculus, the jobs growth and political donations resulting from the shale-gas boom have given him the cover he needs to de-emphasise wind and solar.

For all its gains, however, the shale-gas juggernaut is not invincible, and the adverse environmental impacts of fracking would seem to represent one of the clearest advantages for renewables.

Thanks to documentaries like 2010’s Gasland, which showed tap water at one Pennsylvania farm being ignited with a cigarette lighter, or the new Matt Damon movie Promised Land, the sector has become synonymous in the minds of many with underhanded business practices and appalling environmental standards.

Without question, there are plenty of examples of egregious behaviour by gas companies, especially in the early days of the Marcellus Shale boom, before regulators woke up.

Still, while the side effects of fracking may yet prove unpalatable to the American public, the backlash that environmental campaigners have been trying to foment has largely failed to materialise, and it is becoming harder to blame this purely on ignorance or disinformation.

The reasons are complicated, but the jobs growth associated with the sector, coming at a time of jarring economic dislocation across much of the Rust Belt, clearly plays an important role.

Amid the buzzing petrol stations and sandwich shops, it is impossible to ignore the impact natural-gas crews have on local economies in rural Washington and Greene counties. Pittsburgh, where many of the white-collar workers from the boom have based themselves, is enjoying its highest commercial property rates since 2000.

“Shale gas has become very apolitical in Pennsylvania,” says Dennis Yablonsky, chief executive of the Greater Pittsburgh Chamber of Commerce, which also supports renewables. “The wells have been drilled, and people recognise the benefits of it. They realise that maybe some of the potential negatives weren’t as bad as they thought.

You still get people who show up at conferences and scream about it, but that was happening all the time before.

There’s still plenty of room for debate on how we develop this resource, but we’re having a more fact-based debate now.”

Even the potentially disastrous side effects of fracking, such as water pollution and earthquakes, have proved a less useful debating weapon than environmental groups had hoped, because natural gas emits up to 70% less CO2 than coal when burned for electricity.

Gas groups claim that the decline in total US CO2 emissions over the past few years — down 12% in 2012 compared to their 2007 peak — is proof that shale gas is a valuable ally in the fight against climate change.

It burns more cleanly than coal, that’s true,” says Jamie Resor, chief executive of groSolar, which builds PV systems in the Northeast and Mid-Atlantic regions. “But what we’ve seen in Pennsylvania and other parts of the country is that the measures you have to use to get [shale gas] out of the ground are horrendous.”

For renewables, however, all is not lost. There are reasons to believe that the impact of shale gas may be more muted in the years ahead — or even play a positive role in the development of wind and solar.

The simplest way for that to happen would be for gas prices to float back to reality, and that is already happening as producers — rendered unprofitable by the low prices — rein in production.

Having hit a decade low of $1.82 per million BTUs last April, the Henry Hub spot price currently stands at $3.19.

The expectation of an abundant domestic supply is leading many US power generators to replace ageing coal plants with combined-cycle gas turbine plants, which will boost long-term demand and lift prices.

That trend will be bolstered further by new demand from other directions, such as a growing fleet of natural-gas-powered vehicles and an imminent petrochemicals renaissance in the US.

Another hugely positive sign came in December, when the Department of Energy released a long-awaited report concluding that the benefits of exporting gas from the US — long a net importer — outweigh the benefits of keeping it at home.

"Our view is that this is part of a broader cycle,” says EverPower’s Spencer. “You’ve got $3 gas here and $17 gas in Japan. Once gas becomes a global commodity, the price will end up somewhere in between” and renewables will again be competitive.

Finally, there are the voices — mostly tied to the gas business — that claim that gas is a necessary prerequisite to a greater penetration of renewables.

GE is among the leading proponents of this view, with its new FlexEfficiency gas turbines designed specifically to rapidly ramp up and down as renewable electricity flows on and off the grid — something coal and nuclear plants are unable to do. In theory, this could allow renewables to move beyond the 30-40% penetration cap seen in some countries today.

Paul Browning, president of thermal products within GE’s energy division, says he lives on the same street in upstate New York as Vic Abate, GE’s vice-president for renewables. “We are constantly helping each other understand what’s happening in these industries, putting our heads together to think through what’s the right way to play this new energy dynamic,” Browning says.

"We very much see gas and renewables working together, rather than in competition.”

Many in the renewables business would love nothing better than for the shale-gas genie to be shoehorned back into the bottle. It is still possible that an environmental crisis wrought by shale gas — a devastating earthquake, for instance — could make that happen.

But in all likelihood, shale gas is here to stay in the US and will be developed in other countries. Rather than burying its head in the sand, the renewables business would be wise to decide how it wants to engage with gas — before those decisions are made for it.

“I don’t think it’s going to kill the renewables industry,” says Riverstone’s Hunt. “It’s certaintly going to make the industry stand up and work harder. It might bring down growth for a period. But we had to get to grid parity anyway — this just changes the number a little bit.”

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