September 2016, Vol. 243, No. 9


Power Generation Moving to Greener Future with Natural Gas

By Adam Forni, Senior Research Analyst, Navigant Research

The power generation industry is undergoing sweeping change. Global governments finally accept the reality of climate change and are opting for generation with lower carbon footprints, as witnessed in the COP21 agreement and various national policies. Generation is also shifting from a centralized model to distributed, uprooting utility business models as technological improvements allow customers to generate electricity more reliably onsite.

And, even as sun-fueled renewables like PV and wind drop in price and flood the market, another fuel is becoming more accessible and affordable thanks largely to the fracking boom: natural gas. The three developments noted above – sustainability, reliability, and greater access to cheap fuel – give distributed natural gas-fueled generation (DNGG) a bright future.

Natural gas pollutes less than most fuels used for electricity generation. According to the IEA and EPA, typical centralized NG generation emits 400 grams of carbon dioxide per kilowatt-hour, which is better than diesel, bituminous coal, and the aggregated U.S. electric grid by 42%, 53% and 43%, respectively.

Environmental regulations thus favor natural gas. For example, the U.S. Clean Power Plan calls for natural gas generation to displace many coal plants to reach 1980s-level emissions by 2025. DNGG performs even better than centralized natural gas generation: eliminating transmission losses and utilizing waste heat onsite can push net efficiencies above 85% compared to  the U.S. electric grid’s 33%.

Reliability is an even more important driver for DNGG adoption. In the United States, reported major electrical disturbances quadrupled from the period 2001-05 (average 44 per year) to the period 2011-15 (average 207 per year). The annual cost of weather-related outages in the United States is estimated to be as high as $33 billion. The weak grids of the developing world are even worse off: businesses in low-income countries report losses of 9.8% of sales due to outages, more than seven times that of high income countries (1.4%).

As global electrification grows, outage frequency likely will also, boosting demand for dispatchable onsite generation. Diesel generators (gensets) traditionally dominate this market, claiming around 90% of global sales of reciprocating engines for power generation. However, the natural gas 9% market share will grow as more global customers get natural gas service, emissions regulations shun diesel, and customers recognize that natural gas gensets often have lower lifetime costs.

Fuel cells and microturbines are also capturing market share in this area, with both forecasted by Navigant Research to see double-digit compound annual revenue growth over the coming decade. Fuel cells have high electrical efficiency and microturbines have low maintenance requirements, just some of the reasons these newer technologies are taking market share from the mature, incumbent gensets.

Growing global access to cheap NG will also stimulate DNGG growth. Prices are near 10-year lows in most global markets, thanks in part to hydraulic fracturing (fracking) opening vast new reserves of natural gas. Growing supply is widely expected to keep natural gas relatively cheap over the medium term, and customers can lock in prices with long-term contracts.

As fracking expands beyond its North American roots and global energy demand grows, natural gas will become the fastest-growing fossil fuel over the coming decade. Though much of this growth is in centralized generation, the extra pipelines needed for this growth will give many more small-scale customers access to natural gas. This will be especially welcome in the developing world where natural gas grids have lagged and expensive truck-delivered diesel has been the default choice.

There are some potential threats to DNGG’s growth, including high capital costs, competing technologies, and environmental concerns. Fuel cells and microturbines are too costly for anything but niche subsidized markets, so prices must continue dropping to achieve widespread adoption. Novel financing models are helping overcome these high costs, as are new revenue streams related to peak shaving and utility services.

Competing technologies include renewables like PV and battery storage which continue to drop in price and (unlike DNGG) are immune to eventual fuel price increases. However, high-capacity factor and small footprint give DNGG technologies an advantage, so it is often complementary to PV as a source of baseload power. Greenhouse gas (GHG) emissions remain a concern with the entire natural gas supply chain, from production to storage to electricity generation.

Fracking is being banned in some jurisdictions over environmental concerns. In February near Los Angeles, the worst natural gas leak in U.S. history led to calls for reform of gas storage. (It also prompted calls for electricity storage to prop up the hobbled gas storage, a new twist that underscores the impact of natural gas’s popularity.) And just recently the New York State Assembly introduced legislation that would outlaw emissions in the state by 2050, a move that if copied elsewhere, could cause concern for DNGG over the longer term.

Despite those concerns, the sustainability, reliability and affordability afforded by DNGG position it for strong growth in the coming decade. And yet there are two other reasons DNGG is crucial for a low-emissions future: renewables integration and technology development.

First, growth in renewables (and thus intermittency) is calling for more clean, dispatchable resources to support the grid. Diesel has done well on capacity auction in places like the United Kingdom, but DNGG is cleaner and better positioned for renewables integration. Finally, research and development in some forms of DNGG is a direct investment in a zero-emissions future.

For example, fuel cells, long heralded as the key to the zero-emissions hydrogen economy, are currently fed largely with natural gas that has been processed into hydrogen. Thus, improvements being made on commercialized NG products now are also paving the way toward a zero-emission future. That future is a long way off, but DNGG is a bridge that moves us that much closer.

Author: Adam Forni is a senior research analyst contributing to Navigant Research’s Energy Technologies program, with a focus on distributed natural gas. Forni has broad technical experience covering electrical systems, mechanical systems, energy efficiency, and financial modeling. In 2013, he received the American Council of Engineering Companies’ Award of Excellence. Forni holds an MBA from the University of California, Irvine and a bachelor’s degree in mechanical engineering from Valparaiso University.

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