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WIREs Energy Environ.

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An assessment of price convergence between natural gas and solar photovoltaic in the U.S. electricity market

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Joseph Nyangon, John Byrne, Job Taminiau

Published Online: Dec 15 2016

DOI: 10.1002/wene.238

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The U.S. shale boom has exerted downward pressure on natural gas prices nationally, widened oil‐to‐gas price spreads, and accelerated coal‐to‐gas fuel substitution. One concern is the impact of the rising production of shale gas on further development of a domestic solar photovoltaic (PV) market. Specifically, will lower natural gas prices slow or even reverse the current rapid growth in the solar market? Using the Phillips–Sul convergence test, this paper investigates whether the levelized cost of energy (LCOE) of solar PV and natural gas electricity generation in the United States have converged. Using weekly Henry Hub‐linked natural gas spot prices and utility PV system prices from 2010 to 2015, empirical tests for convergence are applied to examine the extent of spot market integration and the speed with which market forces move the two energy prices toward equilibrium. The paper also assesses the link between the MAC Solar Energy Index (SUNIDX) and the S&P GSCI natural gas index spot prices for evidence of market integration during 2007–2015. We conclude that PV and natural gas prices are not converging, and the two markets are not integrated nationally, but some level of integration could exist at regional and state levels that will need to be tested in future research. We also conclude that complementary use of the technologies is likely; while price convergence is not likely to occur soon, distinctive complementary benefits of each resource compared to each other (e.g., fast‐start capabilities for gas and low price volatility for PV) will offer opportunities that expand market demand for both. WIREs Energy Environ 2017, 6:e238. doi: 10.1002/wene.238 This article is categorized under: Photovoltaics > Economics and Policy Energy Systems Economics > Systems and Infrastructure

Major gas‐producing states. Notes: Data for 2014 are estimated. Monthly preliminary (from January 2014 to present) state‐level data for the production series, except marketed production, are not available until after the final annual reports for these series are collected and processed. From 2007 onward, gross production from coalbed methane and shale data are obtained from PointLogic Energy. Coalbed methane refers to methane generated during coal formation and is contained in the coal microstructure. Typical recovery entails pumping water out of the coal to allow the gas to escape. Methane is the principal component of natural gas. Coalbed methane can be added to natural gas pipelines without any special treatment.

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The utility PV project pipeline indicates strong future growth in the sector. PV, photovoltaic.

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Development of the U.S. PV market categorized by residential, nonresidential, and utility‐scale PV installations. Notes: The total U.S. PV capacity additions are based on GTM Research and SEIA (2010–2015), IREC's data collection, and LBNL's Tracking the Sun database. GTM, Greentech Media; PV, photovoltaic; SEIA, Solar Energy Industries Association.

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Price volatility in the PV and natural gas markets. PV, photovoltaic.

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Natural gas and SUNIDX indices log spot prices.

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Relative transition paths (club convergence).

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Sensitivity analysis of PV system model parameters. Sensitivity analysis was conducted by adjusting the input variables up and down +/−10%.

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LCOEs of CHP and PV systems. CHP, Combined Heat and Power System; LCOE, levelized cost of energy; PV, photovoltaic.

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Levelized cost of energy of natural gas‐fired CHP and utility‐scale PV generation systems. CHP, Combined Heat and Power System; PV, photovoltaic.

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Performance of solar and natural gas indices from 2008 to 2015.

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Historical changes in daily natural gas spread 2008–2015. Notes: Prices are based on delivery at the Henry Hub in Louisiana. Official daily closing prices at 2:30 p.m. are obtained from the trading floor of the NYMEX for a specific delivery month. The NGPL composite price is derived from daily Bloomberg spot price data for natural gas liquids at Mont Belvieu, Texas, weighted by gas processing plant production volumes of each product as reported on Form EIA‐816, ‘Monthly Natural Gas Liquids Report.’ The SONAT Index is a monthly cash‐settled Exchange Futures Contract based on the mathematical result of subtracting the monthly price published by Inside FERC, as defined in Reference Price B (Natural Gas‐Southern Natural (Louisiana)‐Inside FERC), from the average of the daily prices published by Gas Daily, as defined in Reference Price A (Natural Gas‐Louisiana (Southern Natural)‐Gas Daily). Price quotation convention is one hundredth of a cent ($0.0001) per MMBtu. NGPL, natural gas liquids; NYMEX, New York Mercantile Exchange.

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Growth in shale production gas.

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Further Reading

Hefley, EW, Yongsheng, W, eds. Economics of Unconventional Shale Gas Development: Case Studies and Impacts. New York: Springer, 2015. ISBN: 978‐3‐319‐11498‐9.

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