Green Energy May Yet Survive Poison of Cheap Gas

The price of solar energy in certain areas of the United States has fallen below 8 cents per kilowatt hour - compared to about 6 cents for natural gas based on current prices - according to consultancy Green Tech Media. 

Photo by JEAN-PIERRE MULLER/AFP/Getty Images

The cheapest natural gas price for a decade is a boon for American homeowners. At less than $2 per million British thermal units, though, it looks toxic for its already troubled rival, the solar energy sector. But gas isn’t close to chocking the life out of it just yet. 

There’s certainly enough bad news to go round. Energy bigwigs at a conference this week identified the rock-bottom gas price as the biggest short-term obstacle to developing greener fuel sources. As if to underline the point, the benchmark gas price dipped to its lowest level since January 2002 as they were talking. Meanwhile, solar plant developer BrightSource Energy pulled its initial public offering on Wednesday, citing poor market conditions. On top of last year’s controversial bankruptcy of Solyndra and the 85 percent drop in industry leader First Solar’s share price over the past 12 months, the sector looks far from healthy. 

Still, greens shouldn’t lose heart. The price of generating electricity from the sun’s rays has been falling almost in tandem with gas prices. The wholesale price of panels halved last year, as have solar generation prices: a typical long-term contract in California, a sweet spot for the industry, has plummeted from about 17 cents per kilowatt hour in 2010 to as low as 8 cents, according to Green Tech Media. That brings some solar capacity within striking distance of natural gas at around 6 cents. 

And solar power has a distinct advantage: its costs can be locked in 25 years in advance. Gas offers no such guarantee. For an electric utility this is equivalent to a cautious homeowner opting for a safer fixed rate mortgage over a risky floating rate loan. 

Moreover, the current bargain U.S. gas price can’t be relied on to last forever, even with hydraulic fracturing uncovering vast troves of the resource. America is also likely to start exporting gas in the next few years, which could tug the nation’s gas price back toward the global average - currently roughly five times higher. 

This will be cold comfort for many solar panel makers who won’t survive the industry shakeout that slumping prices are causing. But the rationalized sector that emerges should be well placed to take on all comers.

Read more at Reuters Breakingviews.