NRRI 17-01 Natural Gas as a Bridge Fuel

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Significant benefits from natural gas

The U.S. natural gas industry has enjoyed a great run over the past eight years. It has contributed to the economy by creating new jobs and significantly reducing households’ and businesses’ energy bills. This was particularly important during the Great Recession when a boost from a major industry prevented further downward spiral of the economy.

Natural gas also benefited the environment by accelerating the retirement of coals plants. The shift from coal to natural gas was a major factor in lowering U.S. energy-related CO2 emissions by 12 percent between 2005 and 2015. Even after accounting for methane emissions, the most credible studies show that switching from coal to natural gas has mitigated global warming. Besides, natural gas emits less air pollutants, like sulfur-dioxide, mercury and nitrogen oxide, than coal.

Because of its abundance of shale gas, the U.S. expects to be a net exporter of natural gas. Until this decade, the worry was that the country would be importing increasing amounts of natural gas from vulnerable areas of the world.

Overall, because of environmentally prudent development of natural gas resources highlighted by advanced technology for hydrocarbon extraction, especially 3D seismic, horizontal drilling and hydraulic-fracturing stimulation, natural gas appears to have a bright future. About 50 percent of U.S. natural gas production comes from “fracking” techniques applied in shale formations, whereas just 10 years ago this percentage was virtually zero.

Recent opposition to natural gas has little merit

Up until the last two or so years, most environmental groups viewed natural gas favorably in facilitating the transition to a low-carbon environment. Today, these groups as well as others have radically altered their perspective of natural gas. They now see natural gas as a barrier to achieving climate-change targets that, in their minds, will help assure against catastrophes. They propose to phase-out, as quickly as possible, the use of natural gas in electricity generation and to include in the dialogue the idea of residential and business customers switching their consumption of natural gas and other fossil fuels for space heating, water heating, and other end-uses to electricity (hereafter called “electrification”).

Natural gas should continue as a bridge fuelNatural gas-fired electricity generation constitutes about 30 percent of total generation, a sharp increase from 17 percent in 2003. Phasing-out natural gas for electricity generation in the next 10 years to be replaced by renewable energy does not seem feasible, let alone economical. The most rational policy, at this time, is to continue relying on natural gas for electric generation for the next two decades and probably even longer. During that time, the U.S. can also grow the penetration of zero-carbon technologies, like renewable energy and nuclear power, to meet increased demand for electricity and replace coal-fired power plants.

In fact, a reasonable argument is that U.S. and state energy policy should encourage the expansion of natural gas for different uses rather than its suppression. A proper balancing of economic and environmental considerations would likely reach that conclusion. Those who advocate less natural-gas usage generally skew their finding by giving little if any weight to the economic effects. Their obsession centers on the urgency of controlling climate change, no matter the cost. Climate change concerns should certainly be a factor in developing energy policy, but not the sole or even overriding factor.

Challenges ahead for natural gas

There is one caveat about the long-term future of natural gas: Natural gas without carbon capture and sequestration is not a deep decarbonization option when compared with energy efficiency, nuclear power and renewable energy. If the world continues its current path toward decarbonization, probably around 2050 if not before, natural gas would cease to be a major source of fuel for electricity generation or even for household and business use.

It is beyond dispute that natural gas for electricity generation has contributed to a decline in carbon emissions over the past several years by substituting for coal-fired generation. Most studies have shown, however, that over the next two or so decades natural gas can increase carbon emissions by deferring the use of renewable energy and nuclear power in the generation of electricity. The net outcome boils down to an empirical question of the extent to which natural gas will affect the economics of zero-carbon technologies, in addition to the growth in energy consumption and economic growth resulting from continued low natural-gas prices.

Electrification, where customers switch from natural gas and other fossil fuels to electricity for direct use (e.g., transportation, water and space heating), does not seem to be a major threat for the natural gas industry in the near future. Electrification is a hard sell as long as natural gas is cheap and electricity generation still requires fossil fuels. Electrification will likely receive only a lukewarm reaction from policymakers. (Appendix A provides some basic information on electrification.)

Although electrification may have little effect on natural gas over the next several years, it is a topic of growing interest, as the U.S. electric power system moves toward zero-carbon technologies. At the point when decarbonization takes hold, the natural gas sector will have to rationalize why a world with zero-carbon electricity generation should not favor households and businesses switching from natural gas and other fossil fuels.

In the interim, it will be ill-advised for the natural gas industry to underestimate the importance of R&D for making natural gas more carbon friendly. The electric industry will surely push hard for electrification if only to bolster its stagnant sales, just as at the beginning of this decade the natural gas industry lobbied hard for customers to switch from electricity to natural gas for space and water heating, and other end-uses.

To wit, while the abundance of competitively-priced natural gas points to a bright future, it is critical for the industry to spend more on R&D and take other actions that will make natural gas more environmentally and overall socially acceptable. Major technological breakthroughs are a requisite for including natural gas in the long-term energy mix, in addition to extending the “bridge” period for natural gas.

The natural gas sector cannot therefore just sit back on its heels, but needs to aggressively support R&D that will lead to innovations assuring its long-term success. Technology can work either for or against the future of natural gas. The natural gas industry, undoubtedly, would want it to work in its favor. Examples are technologies that will reduce methane leakage throughout the natural-gas system, the environmental damage from “fracking” on local communities, and carbon emissions from electric generating facilities. Natural gas could then have a longer life as a major fuel source serving electric generators, households and businesses.

One role for natural gas in the future is to serve as a cost-effective transitional fuel until zero or lower-carbon energy sources become more economically attractive. A second is to act as a safety net against a laissez faire policy on climate change and disappointing performance of renewable energy and other forms of clean energy. Natural gas can buy time before zero-carbon technologies become more economical. If we eliminate natural gas from the mix today, either coal would likely damage public health and contribute to climate change for a longer period, or high-cost renewable energy would lead to higher electricity bills and a less secure and reliable electric power system. Neither outcome would be good for the country.

As a cardinal rule, any public-policy dialogue on the future role of natural gas should steer away from “rhetorical heat” and toward “analytical light”, especially when climate change becomes part of the discussion. But, of course, that is easier said than done.

The focus of this paper

This paper will examine the different roles that natural gas can play in the future, especially in electricity generation. The intent is to assist state utility commissions in assessing these alternative roles, as they will likely have to address them in the not-so-distant future if they have not already. This paper lays out questions for policymakers to consider, while attempting to provide answers to some of them.

By design, this paper is comprehensive in covering a wide range of topics relating to the future role of natural gas in the U.S. energy mix. It provides the reader with a basic understanding of these topics without, in most instances, going into a deep discussion. The reader can use the references in gaining in-depth knowledge of individual topics.

Finally, some of the views expressed in this paper comport with the work of Michael Levi, who wrote an influential and thoughtful article on the subject of natural gas as a bridge fuel. (See Appendix B for the major findings of the article as well as his comments on his blog.) One of his conclusions was that natural gas can serve as a hedge in electricity generation until zero-carbon technologies are ready for prime time. His other conclusions are in line with others who have examined the role of natural gas as a transitional fuel to zero-carbon technologies.

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