Why The NatGas Glut Did Not Kill Renewables

Includes: KWT, PBW, TAN
by: Dana Blankenhorn

Natural gas prices remain stuck near $2.60/mcf, yet renewable energy stocks (NYSEARCA:PBW) are up 22%. Even the solar ETFs, like KWT and TAN, are hanging in there so far in 2012 (after their annus horribilis in 2011).

What's up with that?

My former editor at RenewableEnergyWorld, Stephen Lacey, offers three reasons from his new post at ThinkProgress. The gas glut will end, renewables are still competitive, and natural gas is, after all, a fossil fuel, he writes.

As hard as it may be for me to admit it, that last reason is political. The market doesn't care if you're ruining the environment, only whether you're making money while doing it. And this is part of the problem for natural gas. They're not making much money. Most stocks in companies that produce gas are down near their 52-week lows.

So what's really happening?

  • Natural gas is fuel. A renewable facility is permanent. Natural gas still has to be burned to make energy. It has to be transported. A renewable system on your roof isn't going anywhere. It will remain productive. A wind farm still must have its energy transported, but the connection is a fixed cost and, once depreciated, doesn't have to be bought again.

  • Natural gas prices rise and fall. Renewable costs keep declining. Lower costs for fracking don't guarantee lower output prices. Those are set by the market. Cost decreases on renewables remain in place, year-after-year. The only risk is they will be supplanted by even lower-cost solutions.

  • Renewable savings are multi-dimensional. Natural gas cost savings have a single dimension. There are many dimensions to possible savings on renewables. Not just yield, not just manufacturing costs. But material costs, installation costs, channel costs, savings due to standards and simpler government approvals. All these things impact final cost. All are headed down.

This doesn't even take into account possible game-changing breakthroughs that open new markets for renewable energy.

Like windows.

Or lakes.

And not all these breakthroughs are technological. The water-based system described in the last link uses standard panels, but mounts them on floating platforms that track the Sun and keep the panels cool.

Which brings up another important point about renewable energy vs. natural gas. Natural gas is where you find it. It has to be brought up from wherever it is and transported before it can be turned into energy by burning it. The Sun and the wind are everywhere. They can be tapped where demand exists. Transport costs are lower.

I was already a reporter 30 years ago, when the first renewable energy boom fizzled in the face of declining prices for oil and gas, American military power protecting Arab producers who opened the taps up wide kept prices down for two decades. What's different this time is that renewable technology has matured. The industry sees lower prices as a challenge, not a threat, just as many new American companies are seeing below-cost Chinese solar panel prices as a ceiling for their next round of innovation, rather than the end of the game.

Next time natural gas prices skyrocket it will be an opportunity for renewable companies to scale. And that change will be permanent, not temporary. Which means anyone selling the renewable industries short is in for a rude surprise.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.