With each passing month, it’s becoming more evident that increasingly inexpensive and abundant supplies of natural gas are overhauling America’s energy landscape. The price of natural gas is at a 10-year low and is roughly half of what it was this time last year, due largely to technological advances – in hydraulic fracturing or ‘fracking’ especially – which allow for recovery of enormous stores of natural gas found in shale deposits. Fracking has in turn led energy magnates including General Electric CEO Jeffery Immelt to suggest that natural gas could be “permanently cheap,” and that the U.S. is entering a new era of domestically produced fossil fuels.
In response, analysts and pundits such as Thomas Friedman have expressed concern that the shale gas boom will significantly defer the transition to solar and other renewables. This is a valid point – the long-term goal of the solar industry has always been to be truly price-competitive with conventionally produced electricity, and cheap natural gas makes that a more difficult task.
Yet, this concern is probably overblown. Let’s take a look at reasons why:
First, most of the solar installed in the U.S. is (and will be) residential and commercial solar.
These small-scale systems – typically installed on rooftops – compete with retail, not wholesale electricity rates. The cost of the raw fuel (coal or natural gas) represents just one component of retail rates. In prominent solar markets, especially California and Arizona, utilities are seeking billions of dollars in new rate increases to make capital investments in aging infrastructure, cover increased personnel costs, and replace generation facilities rendered obsolete by time, changed market conditions, or government mandate. These increased costs are more than offsetting the benefits of cheap natural gas, meaning that millions of homeowners and businesses will continue to see small year-over-year increases in electric bills. This of course, is good for solar, which allows homeowners and businesses to hedge against these future price increases and save money from day one.
Second, natural gas has a rich history of price volatility, while solar prices are free-falling.
In the past few years, gas prices have risen and fallen like the stock market, and most experts believe that current prices are at rock bottom. Less is understood about solar’s cost reduction. In fact, much to my dismay, I consistently see cost data used from studies that were published last year, which used raw data from between two and three years ago. Frankly, such data is now meaningless except for historical benchmarking, as solar’s progress in the arena of cost-reduction has been near exponential as of late. First-tier solar panels at sub-$1.00 per watt were a far-fetched scenario 18 months ago. Today’s wholesale solar panel prices are below $.75 per watt, creating pricing dynamics that have shocked even solar’s most optimistic advocates and forced certain high-cost solar manufacturers out of business.
Even if natural gas is permanently cheap, solar is also at unprecedented and permanently cheap price points. All indications are that solar will continue to get cheaper in the future.
Here’s the bottom line: In the race to cost-competiveness, both natural gas and solar are running faster than ever, but solar admittedly has farther to go. At current price points solar is very competitive when compared to retail electric rates, but isn’t yet truly competitive at wholesale electricity pricing – but the race is far from over. Indeed, the last 12 months have brought enormous changes to both industries, making predicting the next three to five years a much more difficult task. What is certain, however, is that expectations are going to be shattered, all energy sources will truly need to be market competitive to retain their viability, and the prospects of clean, domestically-produced energy from a variety of sources – including the sun, wind, and earth – are a good play for our energy future.
Ben Higgins serves as the Director of Government Affairs for Mainstream Energy Corp., where he works closely with company and industry leadership, as well as state and federal policymakers to craft policies that make for a more stable, sustainable business environment for solar. Higgins has over a decade of experience working in the legislative and regulatory arenas.