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Wood Bioenergy and Natural Gas Prices

In his recent post, Fossil Energy and Cigarettes, Stan Parton broached the subject of the cost of fossil energy and renewables. According to Parton, the true costs of fossil energy are not factored into the price of the electricity being generated from these sources. If the true costs of fossil energy—including environmental and health costs—were factored into the final price of electricity to consumers, then renewable energy would be able to compete on an even playing field with fossil energy.

One of the major obstacles for wood-to-energy industries in the last few years has been the quick uptick we’ve seen in the supply of natural gas, an increase in supply so significant that prices have plummeted. According to Doug Tiffany, an agricultural economist at the University of Minnesota, “The era of low-priced natural gas has blunted opportunities for biomass and other renewables"(read Low Natural Gas Prices Undercut Minnesota’s Biomass Projects," which appeared in Wood Bioenergy's blog). The era of low-priced natural gas may just be over, however.

In a new report, Dr. William Strauss of FutureMetrics looks specifically at the cost of natural gas. In An Analysis of the Future of Natural Gas Prices and Wood Pellet Prices, Strauss concludes that though the conventional wisdom suggests that natural gas prices will remain low due to the recently discovered shale gas reserves, several other factors will, in fact, push prices higher.

“Natural gas produced in the US is essentially captive to our pipeline system which goes no farther than Canada and Mexico,” says Strauss. Because the US market is “demand constrained” at the moment, supply is abundant and prices are low. In a relatively short time, however, global demand for natural gas will increase, and other countries—including those already comfortable with high energy prices—will be willing to pay more to pull that supply. The US supply chain, eager to capitalize on these higher profits, will adapt to meet the demand by exporting liquid natural gas (LNG). And when this happens, natural gas prices—both domestic and export—will rise.

Global demand will be influenced by at least two factors, according to the report:

  • Natural gas will become the dominant transportation fuel. Currently, consumers in the US pay the equivalent of $30.40 per MMBTU for gasoline, and prices are higher than that in Europe and Japan. But the current cost of natural gas for heating purposes in the US is closer to $10/MMBTU. As natural gas moves from a residential heating source to a transportation fuel source, Strauss says, prices will increase.
  • As countries move away from using coal and nuclear as sources of electricity, natural gas will supply a larger portion of the electricity market.

As a result of these factors, Strauss believes that the era of cheap natural gas will be a thing of the past “well before 2020.”

And as natural gas prices rise, wood bioenergy will be a more attractive proposition.  If Strauss is right, the cost of natural gas and domestic wood pellets will reach parity at $15/MMBTU by 2016. By 2020, he expects pellets to be $5/MMBTU less expensive than natural gas.

(Note: the wood pellet section of Strauss’ new report focuses on the cost of domestic wood pellets in the Northeast and Midwest. The additional costs of exporting industrial grade pellets—higher quality standards and shipping—are not taken into consideration. Read the full FutureMetrics report here.)


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Wood Bioenergy and Natural Gas Prices | F2M Market

07-03-2012

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