When will Natural Gas Peak in the US?
Natural Gas Prices Are Unsustainably Low | OilPrice.com
September 2015 could prove to be the peak production month for natural gas in the US. Since then, production has fallen 1.2 billion cubic feet per day (bcf/d). Consumption and domestic production are both about 75 bcf/d, but with imports near 2 bcf/d, the US is deep in a gas glut.
Conventional gas has been in decline while shale plays have grown the supply enormously. Art Berman notes that about 15 bcfd of new capacity must be added this year to keep supply levels constant. However, many producers need gas prices over $4/MMBtu to be profitable. Thus, the supply will decline until supply becomes tight enough to boost prices to "sustainable" levels.
However, I have to question whether there is any sustainable price level for natural gas. Gas at $3/MMBtu in a boiler is able to produce power at a fuel cost of $31/MWh. Wind and solar PPAs, however, are in range of $25 to $45 per MWh. Thus, burning natural gas is not competitive with wind and solar at above $3/MMBtu. Moreover, solar will continue to come down in price 10% or more per year.
US wind installations were 8.6 GW in 2015, up 77% from prior year, and solar installations hit 7.5 GW. This was in a year when gas mostly traded below $3/MMBtu. Apparently, cheap gas is not sufficient to halt the advance of wind and solar.
Moreover I estimate that the 8.6 GW of wind and 7.5 GW are sufficient to offset burning 0.64 to 0.82 bcfd of gas for power. An offset of about 0.7 bcfd is significant in a market with an oversupply of 1.2 to 1.6 bcfd. An yet this offset each year can grow nominally around 30% per year. At this pace, we are looking offsets of 0.9 in 2016, 1.2 in 2017 and 1.5 in 2018. Demand grows only about 1 bcfd per year. So within the next three years we should cross a threshold where renewables satifying a demand for incremental natural gas.
Excluded from this calculation is substitutions with coal and oil. While oil is in a severe glut of its own, it is unlikely that natural gas will find favorable substitutions with oil. Coal and gas have nearly the same price per Btu, thus the offset should impact both proportionately. So about half the offset to gas and half to coal. Additionally, batteries will have a greater impact on peak gas consumption. This would intensify the gas offset since peakers use more BTU per MWh than baseload gas or coal. Thus, the offset in 2018 very well could be sufficient to remove all growth in demand for gas.
So if the peak was not already September 2015, I am pretty confident that the peak occurs by 2018. If the current glut is sufficient, demand may never push supply to higher levels of production.
Coal has peaked, and now natural gas is peaking. These have profound implications for the distributed solar. One, it is not possible for gas to fall low enough in prices to slow down the uptake of renewables. However, gas price will need to increase to maintain supply. When this happens, renewables will be decisively more competitive. Two, utilities will be burdened with increasingly uneconomical generations assets. They will attempt to recover these losses from ratepayers increasing the burden of being on the grid. Three, rooftop solar will increasingly be in direct competition with utility solar. Batteries will be important for price support in the wholesale markets. Advantage goes to batteries in distribution. The value of location will need to be given serious consideration and is currently neglected in rudimentary attempts to value distributed solar. But distributed solar and batteries have considerable location all value.
