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November/ December 2012 How We Could Blow the Energy Boom

America’s vast new surplus of natural gas could lead to great prosperity and a cleaner environment. But if we don’t fix our decrepit, blackout -prone electric grid, we could wind up sitting in the dark.

By Jeffrey Leonard

For the first time in four decades, spanning the last eight presidents, America is poised to break free of its energy crisis. The country finds itself suddenly awash in domestic energy, especially new supplies of natural gas extracted from shale rock. The economic windfall is already enormous. According to a recent study by energy analysts, consumers saved more than $100 billion in 2010 alone as a direct result of the natural gas boom. Economists at Bank of America calculate that the boom contributes nearly $1 billion per day to the economy, equal to 2.2 percent of GDP—roughly the same as the economy’s rate of growth in recent years.

The environmental windfall is also substantial. Relatively clean-burning natural gas is rapidly replacing coal as our primary source of electricity, leading to reductions in greenhouse gas emissions. Gas-fired power plants are also more easily integrated with renewable energy sources such as wind or solar, giving that industry a boost. The potential benefits of the gas boom also include the promise of a manufacturing revival in the U.S. based on the comparative advantage of lower energy costs, and the opportunity for the country to overcome its chronic trade deficits. This “energy dividend” could be, in other words, the biggest game changer in global politics and economics in a generation.

Yet this bright shiny future is hardly assured. While natural gas deposits could very well yield enough to sustain our energy needs for another century, there are many reasons to fear that we won’t succeed in maintaining adequate supplies of economically available natural gas, or in putting enough of it to optimal use—generating electricity.

More fundamentally, in order to capitalize on today’s energy dividend, we need to meet a second essential precondition: repairing, expanding, and modernizing our overstrained electrical grid. As it stands, the grid—an interconnected network of 360,000 miles of transmission lines and substations linking more than 6,000 power plants to customers nationwide—is an inefficient and increasingly blackout-prone tangle of 1950s technology. In its present dilapidated state, it is not only imposing unacceptable and avoidable environmental costs due to its inefficiency, it is also making us vulnerable to an array of threats that could dramatically impair the U.S. economy tomorrow—regardless of how much surplus energy we have in the ground.

The gas boom could bring us nearly limitless potential for building a greener and more prosperous future. Yet without long-term planning and bold political leadership to fight for the right policies, America may wind up awash in cheap energy, while American homes and businesses are stuck in the dark.

Many people will come to this subject concerned about the environmental consequences of “fracking”—that is, hydraulic fracturing—of natural gas, and it’s certainly an important issue. But as this magazine has argued (see Jesse Zwick, “Clean, Cheap, and Out of Control,” May/June 2011), with the right regulations we can reduce the adverse environmental consequences without fundamentally altering the total volume of natural gas produced.

Properly deployed, natural gas has the potential to enable America to overcome our dependence on coal, an extremely dirty fuel, as our primary source of electricity. The result will be profoundly positive for the environment simply because natural gas is substantially cleaner than coal. When used to generate electricity, natural gas emits about half as much carbon dioxide, produces some 80 percent less nitrous oxide pollution, and releases negligible sulfur dioxide, particulate matter, and mercury compared to coal. Electricity generation accounts for 40 percent of all carbon dioxide emissions in the United States, so this transition alone provides us with a clear path over the next several decades to make dramatic reductions in greenhouse gas emissions.

Another, often overlooked, environmental benefit of using natural gas to produce electricity is that it facilitates the development of other energy sources that cause no emissions. Unlike coal-fired plants, those fueled by natural gas are easy to “turn up” and “turn down.” This means that they work well in concert with wind or solar power—when winds are calm or the sun isn’t shining, natural gas turbines can ensure that electricity generation remains constant. In 2010, Florida Power and Light brought online a new breed of hybrid power plant connecting one of the country’s largest solar thermal power plants with an existing natural gas complex.

Utilities nationwide are already accelerating the shift toward natural gas. So far this year, gas-fired generating plants have accounted for about 45 percent of national electricity production, up from 30 percent in 2008. Old coal-fired power plants have been decommissioned this year at a record pace. Much of the electricity supply that we’ve lost in the process of decommissioning coal plants is being replaced by increased usage of existing natural gas plants, which run at a much higher level of efficiency than coal plants, and currently run less than half of the time. America is therefore presented with a golden opportunity to accelerate the transition away from coal and achieve major greenhouse gas emission reductions, without needing to build all new power plants.

Yet the more our electricity supply comes to depend on natural gas, the more that fears about the long-term price and supply of gas could begin to retard the rate at which power companies convert from coal. Investors and industry executives remember the first big “dash to gas” by the electricity industry during the 1990s, when they invested billions of dollars in new natural gas-fired power plants. By the end of the decade, surplus natural gas supplies were gone, and many utilities and electricity generators were sent reeling by skyrocketing gas prices.

One reason for those fears is that gas drilling has historically been a boom-and-bust business. When the price of gas is adequate, wildcatters heed the call to “drill, baby, drill” and supply is assured. When the price is low, however, huge reserves of gas effectively disappear because it costs more to get this gas out of the ground than the market will pay. Today’s new drilling technologies make the cost of producing gas inherently cheaper, but they do not ensure that enough gas will always be economically available to serve as a reliable replacement for coal, nor do they change the long-term boom-and-bust nature of natural gas supplies and prices.

Shortsighted business practices or government subsidies could also end up squeezing the amount of gas available for the generation of electricity. Unlike coal, which is almost exclusively used for electricity generation, natural gas has many economic applications. Almost one-third of America’s natural gas supply today is used for industrial feedstock in chemical plants and in fertilizer and other industries, and another 36 percent is used in commercial and residential spaces for heating and cooking. New England is increasingly using natural gas in place of home heating oil, and countries like Canada and Mexico are driving increased demand for exports of American natural gas. Electricity generators, which now account for a third of natural gas use, will have to compete in the marketplace with these and other uses for secure long-term supplies.

Jeffrey Leonard is the CEO of the Global Environment Fund, a growth capital-oriented investment firm, and the chairman of the Washington Monthly board of directors. He is the author of five books and numerous articles on issues relating to energy, the environment, and economics.

Comments

  • A.Oscar Antonio Oscar on November 12, 2012 10:56 AM:

    The way we have the world with the Earth real sick; donít going to the first, not even the last one. And worse ones will be around again soon; Iím not to the point be negative, just the reality in the account to my studdingís. A.Oscar

  • Eric on November 12, 2012 1:18 PM:

    When burning gas at a plant to generate electricity, a large amount of energy from the gas is emitted as heat and wasted. When burning gas in my furnace to heat my home, the heat given off is actually used. I'm skeptical that electricity generation is the "optimal use" for natural gas (despite some justifications given in the article).

  • Dave on November 12, 2012 1:56 PM:

    Eric, heat is one of the lowest forms of energy, so although the efficiency of a gas furnace can be very high, the use of natural gas in a modern gas combined cycle generator produces high quality energy in the form of electricity, a much more flexible and powerful tool than the low level heat you get from burning gas. An additional factor is that modern heat pumps powered by electricity can be more efficient than gas furnaces while also providing air conditioning. The bigger picture here is that any long term thinking about national energy use will have to pay attention to issues like the one you raised while also thinking about the impact of a major effort to retrofit buildings to be more efficient overall. Energy not-used is just as valuable as finding more.

  • Ed on November 13, 2012 6:29 PM:

    We could blow the energy boom by paying any attention at all to editorials from manipulative con artists from crooked hedge funds.

  • M. Report on November 13, 2012 6:57 PM:

    Backup generators are popular in areas hit by Frankenstorm.
    Standby generators, their big brothers, are also being
    ordered at a good clip.

    Downsize, standardize, modularize, modernize;
    Build a bullet-proof Grid !

  • Corky Boyd on November 13, 2012 8:58 PM:

    The availabilty of inexpensive gas will have profound effects, well beyond its substition for coal in electric power generation.

    The largest item in our balance of payments defecit is energy. The world gas price outside of the US is $10 to 12 compared to under $4 in the US. The fact shale formation gas is generally profitable at around $2 gives the US a tremendous advantage in the world market. Russia, which has a near monopoly in Europe, has proven to be an unreliable source. And it pegs its price to the btu content of oil. This supply and priceing monoply can be broken, but only if the US can build a liquifaction and port facilities to market it. And do it quickly. Regulatory hurdles could make us miss this golden moment.

  • Fred Z on November 13, 2012 11:22 PM:

    Obama's gonna prevent it from being produced and what is produced he's gonna steal to pay for Sandra Fluke's condoms and Obama-phones for pond-scum.

    You Americans are so screwed.

  • Sam Hall on November 14, 2012 6:38 AM:

    Ed, you got it.

    I have never heard that transformers had a lifetime. With proper maintenance and protection, they should last hundreds of years.

    A "smart Grid" is all about control of your energy use - no thanks.

    More government is the last thing we need. Look at what is happening on Long Island with a government run power system.

  • Michael on November 15, 2012 7:41 PM:

    If the administration hadn't squandered the bulk of that $90B stimulus fund marked for energy efficiency on failed solar companies linked to his campaign contributors, we could have some of that smart grid technology.

    But that would have been marked for other campaign contributors and probably squandered as well.

    Why don't we create real competition, unfreeze electrical rates and reduce regulation in the utility industry? If the smart grid has all the advantages claimed, smart utilities will tap capital markets and build it. Nah...government and all you "experts" know best.

  • Andrew on November 16, 2012 7:33 PM:

    If we are going to stick with the problematic concept of heavily regulated utilities, said utilities won't have much interest in investing in smart grids and infrastructure (read: capital) if prices can't be manipulated to produce the returns necessary to justify the upfront expense. We'd be better off with unregulated utilities that actually have to compete with each other for customers. Broadband and cable customers suffer the same problem of a highly regulated industry leaving multiple providers, but conveniently usually just one to choose from where they live.

  • N.Wells on November 18, 2012 6:06 PM:

    Not only has humanity has never failed to screw up an energy boom, but it has also never avoided screwing up the environment at the same time, whether we are talking about firewood, charcoal, whale oil, coal, nuclear, or petroleum, so the chance of getting this one right is infinitesimally small. What will happen is that we will collectively rush to produce, therefore ensuring overproduction combined with deleterious environmental effects, a temporary glut with cheap prices that leads to a crunch with high prices later, rapid depletion of an invaluable but finite resource, and abandonment of research into sustainable alternatives. The Republicans controlling my state (Ohio) are pushing to produce as much as possible as soon as possible lest we miss out on the boom, and with minimal regulation of and payments from energy companies (lest they pursue their part of the boom somewhere else), all without thinking that whatever we don't produce in the next decade is no less usable and valuable in subsequent decades. We really aren't thinking long-term. There's no reason we couldn't exploit the resource slowly, expanding drilling areas over the next 100 years to ensure a slow and steady boost to the economy, but our capitalist system doesn't readily allow that degree of planning and control. Hydrocarbons actually have many more valuable uses than cheap fuel (fertilizer, plastics), so humanity will be much worse off once it starts getting scarce. Quite clearly, our view toward far-distant generations is, screw 'em.

    There used to be a story about a prayer in Texas: Dear God, just give us one more boom, and we promise not to piss it away like all the others.