M-RCBG Associate Working Paper No. 14

The Shale Gas Paradox:
Assessing the Impacts of the Shale Gas Revolution on Electricity Markets and Climate Change

Andrew K. Cohen

2013

Abstract

The United States shale gas revolution has led to record-low natural gas prices and profoundly affects the energy economy. Shale gas potentially offers a lower-carbon fuel source cheap enough to dethrone coal, the primary and most carbon intensive US electricity source. However, cheap shale gas hinders the economic competitiveness of zero-carbon renewable energy sources like wind and solar. How will shale gas impact climate change? To answer this, three analyses are performed: First, type-curve production and economic modeling for each of the 12 largest US shale gas plays are used to estimate the breakeven price for profitable extraction of shale gas. Second, the impact of liquefied natural gas (LNG) exports on the domestic price of natural gas is analyzed. Third, current financial data from 8,000 US power plants are analyzed to model the cost competitiveness of various energy sources. Also analyzed is the potential for shale gas to contribute to a global low-carbon future, focusing on China.

Without LNG exports, the breakeven shale gas price is ~$4.04/MMbtu. At this low price, natural gas would likely emerge as America’s cheapest fuel of the future. US LNG exporters should be able to charge significantly less than the current Asia LNG prices of over $15/MMbtu, creating a substantial arbitrage opportunity. Potential LNG exports are shown to increase the 2020 price of natural gas by ~$1.16-$1.83/MMbtu (2012 dollars).

Wind, the renewable technology with the best large-scale deployment prospects, cannot currently compete with utility-scale natural gas and coal. Even with the 2.2¢/kWh Production Tax Credit, the levelized cost of wind is calculated to be $69.71/MWh—substantially higher than the sub-$50/MWh costs of coal and natural gas. With added costs associated with the implementation of EPA regulations, coal would rise to the range of wind, with a levelized cost of $67.14. If the US exports natural gas, the cost of natural gas is estimated to rise as high as $64.31. Under this scenario, wind would thus be an economically competitive alternative. (A mechanism to tax carbon would give a crucial advantage to wind; however, it is assumed that no such mechanism will develop in the foreseeable future.) The ultimate climate change solution must involve disenfranchise-ment of coal power and the economic competitiveness of renewable energy sources. EPA coal regulations, government renewable energy subsidies, and a healthy LNG export market appear necessary to accomplish this.

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