Who Will Benefit From Shale Gas?

| About: Clean Energy (CLNE)

Shale gas is moderating gas prices in the U.S. and is likely to have a profound effect on a number of industries. In the clean energy arena, the top three energy sources being utilized by sustainable energy companies are solar, wind, and electricity. Here are some thoughts on the competitive position of these areas.

Wind and Solar

The wind companies compete almost exclusively in the utility-scale, grid-connected market. In the solar market, cells are used both inside the fence and increasingly for grid-connected utility-scale projects. For inside the fence solar, cheap natural gas shouldn’t have a big competitive impact, at least for a while. Most inside the meter projects get to offset tariffs without any standby charges. Since tariff rates are built up from transmission charges, distribution charges, and generation costs, it will be some time before cheap natural gas plants make a dent in tariffed rates.

It’s a different story for the grid-connected wind and solar projects. While many states have renewable mandates, these mandates will have to stand up to the competitive pressures created by shale gas. When you couple $4/mmBtu gas to a 61% efficient, super clean combined cycle (CC) plant, all in electricity costs are low. In December 2010 EIA estimated that advanced CC plants had a levelized cost of 6.3 cents/kWh. The energy component, which many night-time producing wind projects compete with, is currently in the 2.2 cent/kWh range (yes, 61% is a 5593 Btu/kWh heat rate and gas is about $4/Btu). EIA’s next set of estimates may be lower.

Electricity Using Technology

The are plenty of exciting things happening with the use of electricity. LEDs, batteries, power electronics, energy management, and advances in HVAC are some of the bigger areas. I don’t see any significant effect on these activities due to shale gas, unless tariff rates change substantially, which I don’t expect.

Oil Displacement

President after president has targeted our “oil addiction” with efforts to improve our energy independence. To limited effect. Currently 78% of oil is used in transportation and this 78% represents 39% of all energy use in the country. Over half of this oil is imported creating economic and geopolitical problems. Unfortunately, substituting other energy sources for oil in transportation has been largely ineffective. In 2009 electricity provided 0.1% of transportation energy, biomass 3.4%, and natural gas 2.6% (Lawrence Livermore National Lab, 2010, LLNL-MI-410527).

But shale gas may have decoupled natural gas and oil prices and increased the competitive advantage of natural gas. As shown below, from the mid 1990s until 2008, crude oil-- on an energy basis-- has been 1 – 2 times the price of natural gas. But since 2008, when shale gas started having an increasing impact on markets, gas prices have stayed relatively stable while oil prices have risen. The result is that crude is now over 3 times the cost of gas.

So the obvious question is will natural gas’s share of the transportation market increase now that it has a significantly improved economic position? If so, it should be visible in sales of natural gas fuel and equipment for transportation. Clean Energy Fuels Corp (NASDAQ:CLNE) claims to be the largest provider of vehicular natural gas (CNG and LNG) in North America. If any company should see an uptick from having its underlying competitive advantage increase, CLNE is a good candidate. In its latest 10-Q, CLNE reports products and service revenue for the 6 months ending June 30 at $134 million, a 61% increase over the six months ending June 30, 2010. This is an impressive increase consistent with underlying fuel price movements.

Unfortunately, shareholders are not seeing a similar increase. Over the same two periods the company’s Net Income (loss) went from $ (14 million) to $(15 million) in the 6 months ending June 30, 2011. In the graph below, while the competitive advantage of gas has increased significantly since 2007, the share price of CLNE has not tracked this dramatic market dynamic. That said, I think this is an interesting area where a material shift has taken place in economics, and I expect to see increasing market activity as a result.

Share price vs energy ratio changes

Disclosures: No positions