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Don’t Underestimate The Impact of Natural Gas on Renewables

Whether natural gas is a serious foe or friend to renewable energy has been hotly debated. For Fatih Birol, chief economist of the International Energy Agency, the world isn’t paying enough attention to the impact that natural gas production and pricing has on renewable energy development.

“This might be the golden age for natural gas,” Birol said at the World Future Energy Summit, a conference organized by Abu Dhabi to position itself as a key player in a global shift toward renewable energy. “Natural gas might penetrate the market at a higher rate than any of us has anticipated. If natural gas market continues to follow its path, then life for renewable energy may be tougher than we think.”

Global demand for natural gas is set to rise by 44 percent by 2035, with China and the Middle East driving the bulk of the demand, Birol said. Supply of what he called “unconventional gas,” which refers to gas that isn’t easily pumped (such as natural gas from shale formation), will likely account for 35 percent of the global supply by 2035, he added.

The U.S. and Canada have seen a surge in producing shale gas in recent years, but new supplier countries will surely emerge in the coming decades, he said. Abu Dhabi also announced Thursday that its oil company has selected Los Angeles-based Occidental Petroleum as a partner for a $10 billion plan to extract what’s called sour gas in the emirate. Sour gas contains high concentration of hydrogen sulfide and is difficult and dangerous to extract.

Middle East is one of the regions that will help to drive the 36 percent jump in the global energy demand by 2035. Not surprisingly, China will lead the pack for more energy.

The abundance of natural gas in the marketplace now has given it a new persona as a somewhat eco-friendly form of fossil fuel. Burning natural gas to produce electricity emits about half of the carbon dioxide emissions as burning coal. But let’s not forget that natural gas is still a type of fossil fuel.

The abundance of the gas supply means it’s cheap – so cheap that even natural gas evangelist T. Boone Pickens doesn’t consider it a profitable investment. That has caused a glut in the market, Birol said. The “gas glut will peak soon, but it may dissipate only very slowly,” he added.

Still, IEA is bullish that renewable energy will widen its market share because many governments claim they are committed to adopting policies to reduce carbon emissions. Renewable energy consumption, including hydropower will likely triple between 2008 and 2035, and most of that energy will take the form of electricity. Renewable energy’s share of the electricity supply is predicted to grow to 32 percent in 2035 from 19 percent in 2008, the IEA said.

Some have argued that natural gas, no matter its abundance or pricing, will not have a huge impact in areas that have policies that mandate a growing use of renewable electricity. For example, in the U.S., some states require their utilities to increase their purchase of renewable electricity. At the same time, some renewable energy investors say a lack of national policy to address climate change by the U.S. has dampened investments in renewable energy.

Alex O’Cinneide, director of Abu Dhabi’s cleantech investment arm called Masdar Capital, said China has become an attractive hunting ground for investors because the country has strong policies and capital commitments to bolster renewable energy development. A fund Masdar raised jointly with Deutsche Bank recently invested $50 million in a Chinese wind company.

“Western investors, if you have companies in Silicon Valley and you try to find a market there, you will see there is no (government) support,” O’Cinneide said during a panel discussion at the conference.

Disclaimer: Abu Dhabi government paid for my flight and lodging for the conference.

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Image courtesy of sirdle.