Fuel Source of the Future – 7/21/16

With 30+ year lives, power plants are a very long-term investment. This longevity was rarely a problem in the past century when coal was the only fuel source worth considering for large scale usage, but the falling costs of natural gas, wind, and solar power have made things much more complicated. Ironically, the most constant feature of analyses of the energy industry is the fact that coal will definitely not be the fuel of the future.

Using the projections of the EIA AEO2016 Outlook as a conservative estimate of the future based on current technology and policies, it is clear that coal is giving up market share to natural gas and looking deeper into “other renewables” shows most of its gains are from wind and solar.

Screenshot 2016-07-27 at 12.31.42 PM

So there are really three viable candidates for the fuel source of the future and choosing incorrectly could result in relatively poor cash flows.

First is natural gas which the EIA sees as the likely replacement for coal. Natural gas is an incredibly cheap fuel source at the moment due to fracking shale gas and tight oil plays.

Screenshot 2016-07-27 at 1.02.39 PM

Short of those gas deposits suddenly disappearing, coal is doomed to lose market share to its cleaner burning and more profitable fellow fossil fuel.

Of course, the way that the climate change debate is going there is always the risk that even the reduced emissions from natural gas will be too much and the gas plants will wind up as stranded assets. In that case, a healthy alternative could come in the form of wind power, either onshore or offshore. Offshore wind is much more expensive relative to onshore in the U.S. so for now it would be best just to consider onshore wind farms.

The U.S. benefits from an abundance of land suitable for wind farms when compared to Europe, especially in the Great Plains region. However, wind’s gains in the U.S. are also largely limited to states in said region and, short of a massive system of transmission lines stretching from Texas and Oklahoma to other states, it is hard to see wind beating out natural gas in most of the country any time soon.

by state

With natural gas being ubiquitous but unclean and wind being clean but rare, we are left with solar.

Screenshot 2016-06-01 at 12.25.21 PM

solar power

Like wind, solar costs have plummeted resulting in near exponential growth. And like wind turbines, solar panels work best in certain regions, namely those with lots of sun and not so many clouds.

Yet, solar is not limited to those regions to the same degree as wind nor is it so obtrusive that it can’t be placed directly on the buildings to which it provides power, something that greatly reduces the need for costly infrastructure. Although solar will give the most bang per buck in isolated, desert-like regions that aren’t already connected to an electrical grid, solar power has the potential to get so cheap that any area with high enough electricity rates would become fair game as shown below.

res solar 1 res solar 2 res solar 3

So although solar has a clear area where it will always work best, it is still an option in many parts of the U.S. as long as the cost of panels continues to drop as projected. Whether or not it will be the best option in the area will depend very much on proximity to cheap wind (Plains region) or cheap gas (shale/tight oil regions) as well as local electricity rates.

It will interesting to see which energy source dominants in each part of the country, but it is likely that each will have a part to play and see appropriate investment as befits a free market… except coal, I guess.

Print Friendly, PDF & Email

Comments are closed.