Energy Infrastructure
Why Natural Gas is Key in the Shift to Renewable Energy
Article
Oct 16, 2020
Recent power outages in California due to record-high temperatures provide a reminder that natural gas has an important role to play in the energy grid of today and tomorrow as a complementary fuel to renewables. We expect the global power grid will continue to increase its reliance on renewable (namely wind and solar) power over the next few decades, as the proper renewables storage and infrastructure is put in place. Throughout this transition, we believe using natural gas—along with renewables—is the most effective and practical way to reduce our reliance on coal, lower carbon emissions, maintain affordable power prices, and keep power sustainable and available.
Natural Gas is Vital to Meeting Peak Demand, Given the Intermittency of Renewables
Record-high temperatures and an energy supply shortage led California to institute rolling blackouts in August. Governor Gavin Newsom attributed the supply shortage partly to the state’s shift toward renewables, which currently are intermittent power sources that require help from other fuel sources to meet peak energy demand. This intermittency is a reason why we see natural gas long remaining a vital part of the power mix.
The chart below, the so-called “duck curve” because it looks like a duck, illustrates the mismatch between peak energy demand and peak renewables supply. Solar power output (the gray line) increases in the morning as the sun is rising, but then drops as the sun goes down. Meanwhile, if there’s no wind, there’s no wind energy. The orange line shows net load, or power demand (the blue line) less solar and wind generation. Net load and energy demand peak around sunset, when people use more electricity but solar output drops to zero. California, which has ramped up its solar generation capacity in recent years, has been dealing with operational and undersupply issues related to meeting peak energy demand with other power sources.
Natural Gas and Renewables: A Practical Combination for Cleaner and Reliable Energy
The rapid pace of carbon dioxide (CO2) emissions growth has prompted significant political and regulatory efforts to decrease carbon emissions by reducing reliance on fossil fuels. These initiatives are accelerating the pace of renewables growth.
Renewables, namely wind and solar power, remain the linchpin of carbon reduction efforts, emitting no carbon emissions. Yet renewable sources cannot yet be stored and transported in a way that would make meeting peak demand cost effective. Storing these power generation sources at scale is unlikely to be economically feasible for years, meaning other energy sources are still needed to maintain reliable power grids. Natural gas emits 45% less carbon dioxide than coal and is readily available. In our view, natural gas and renewables together for the most practical mix for cleaner and reliable energy. We believe the drive to reduce emissions as quickly as possible without also raising power costs and outage risks will result in natural gas and renewables combined representing the majority of power generation by 2050. (See the chart below.)
The U.S. Provides a Road Map for How Natural Gas can Effectively and Economically Help Reduce Carbon Emissions
We view the U.S. as a road map for where global power generation is heading. After hitting a peak in 2007, U.S. carbon emissions fell 12% by 2018, despite energy demand remaining virtually unchanged. The U.S. did this partly by increasing its production of natural gas, helping to bring down that fuel’s price and make it more cost effective than coal, its dirtier and most direct competitor. (See the chart below.)
The U.S. is close to various European nations on emission reduction progress, yet U.S. energy costs have remained lower due to the country’s reliance on affordable natural gas. In contrast, in Europe, regulations have generally led the energy transition, with policies such as carbon taxes, emissions targets and the phase out of nuclear power driving energy mix decisions. However, in countries such as Germany, peak demand has often been met with the use of expensive coal, leaving consumers paying substantially more for electricity than the average U.S. consumer. Elsewhere, in emerging economies such as India and China, which are expected to lead in energy demand growth over the next several decades, coal clings to substantial market share. Displacing coal in those regions offers a long-term opportunity for U.S. natural gas.
The Implications for Midstream Energy Infrastructure Securities
We believe the critical role of natural gas in today’s, and tomorrow’s, energy grid boosts the long-term fundamental case for midstream energy infrastructure securities. Midstream energy infrastructure assets are required to process and transport natural gas to meet growing energy demand. We expect these assets will continue to deliver stable, if not potentially increasing, cash flows, as the key role of natural gas in global power generation persists.
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