One of the key energy trends that Pike Research has been tracking over the last few years is the rising volatility in the oil-gas price ratio.  Measuring the difference between the price of a barrel of oil and an mmBtu of natural gas, the oil-gas ratio has held relatively constant over the last 25 years, with oil trading at 8 to 10 times the price of natural gas.  While a barrel of oil’s relative energy density to an mmBtu of gas suggests that the ratio should really be about 6 to 1, oil trades at a premium due to global demand and its relative convenience as an energy carrier.

Beginning in 2009, that historical correlation started to disintegrate in the United States, due mostly to a combination of rising global crude prices in response to Middle East and North African geopolitical events and a surge in domestic production from unconventional shale gas.

As illustrated by the chart below, the ratio has reached 50 to 1 in recent months (touching as high as 52 to 1 in April 2012), more than five times the historical average:

As energy commodities, crude oil and natural gas should logically have a high degree of correlation.  In reality, key market differences translate into diverging drivers.  On one hand, oil is a global commodity with macro-level demand drivers, and its price is acutely sensitive to above-ground, geopolitical forces.  Natural gas, on the other, is closely tied to regional markets with prices primarily driven by local forces.

The divergence is significant on many levels, but at the heart of this shift is a fundamental imbalance in energy markets that has yet to run its course.

Writing for the Wall Street Journal, Carolyn Cui explains:

“Customers who burn cheap U.S. natural gas as a fuel currently enjoy a competitive advantage, and buyers of other fuels have a rising incentive to try and switch.  That may eventually narrow the gap again, but it could be a costly and time-consuming process.”

For clean energy, volatility in the oil-gas ratio points to a substantial shift in market dynamics, which even if short-lived, will have substantial implications for cleantech growth over the coming decade.

Consider that one of the key drivers behind the growth in the clean energy sector in recent years was a purported shortage of fossil fuels, specifically oil and gas.  Facing the prospect of Peak Oil and predicted natural gas shortages across the United States just five years ago, stimulus dollars and public policy coalesced around clean energy.  With a scarcity-propelled rise in fossil fuel prices and innovation across the clean energy landscape driving down costs, price parity for grid, fuel, and other applications seemed just around the corner.

While parity can be fleeting, it has been achieved in some applications; in others, a precipitous drop in natural gas prices across North America has raised significant barriers for still growing industries like landfill gas-to-energy (LFGTE), solar, and geothermal, that remain relatively expensive.  As depicted by the sharp increase in the oil-gas ratio, this shift happened almost overnight, and in some instances, caught investors and project developers completely by surprise.  In other applications, such as the use of LNG fuels in place of diesel for captive fleets, lower natural gas prices could actually benefit clean technologies such as biomethane production.

Although the ratio has fallen in recent months, it remains unclear whether a return to the status quo will lead to business as usual or a more permanent diversion will result in a significant paradigm shift.  Some experts argue that current volatility is only a short-term anomaly and that forces will act to bring prices back into their long run equilibrium, while others question whether or not a stable long run relationship between crude oil prices and natural gas prices even existed in the first place.

Amid the uncertainty, many project developers appear to be taking a wait-and-see approach, especially U.S. policy will coalesce behind natural gas away from the traditional fossil juggernauts, coal and oil.  In the first case, unfolding regulations from the EPA targeting coal plants suggest that this shift may be underway; in the latter, time will tell.

While my colleagues Dr. Kerry-Ann Adamson and Dexter Gauntlett and I have examined the natural gas phenomena and its impact on Smart Energy (see Natural Gas – Boon or Bane for Smart Energy?) as well as biogas (see Biogas and the Natural Gas Bonanza), the widening gap between relative prices is certainly worth monitoring.  As Boon or Bane points out, however, it may still be too early to tell which technologies stand to benefit and which may suffer.

In recent weeks, Gevo flipped the switch on its first commercial-scale facility making advanced biofuels and renewable chemicals.  Retrofitting a brownfield ethanol facility in Minnesota to produce isobutanol from corn starch, a chemical that packs more energy than conventional corn-starch ethanol, the development may signal the beginning of the next wave of bioenergy innovation.

Principally designed to do one thing – ferment large quantities of corn starch into millions of gallons of ethanol – first generation production facilities are inefficient energy users and produce a great deal of waste.  Retrofitting first generation ethanol facilities, which are prodigious consumers of electricity and water, is proving to be a bankable (read: “capital light”) strategy for ramping up production of biofuels while reducing the industry’s environmental footprint.

In a typical ethanol retrofit, innovative conversion processes and technologies are “bolted onto” existing assets to create an integrated biorefinery.  Modeled after petroleum refineries, integrated biorefineries use biological matter to produce a range of end-products: transportation fuels, chemicals, and heat and power.  These facilities are designed to be more efficient, sustainable, and profitable than first generation corn-starch ethanol refineries.  Gevo’s 12 million gallon per year facility is just one of several integrated biorefineries arising from the ashes of first generation ethanol.

Accounting for around 10% of U.S. liquid fuel consumption in the transportation sector, corn starch-derived ethanol is a well-entrenched juggernaut in the global alternative energy landscape.  As discussed in Pike Research’s Biofuels Markets and Technologies report, the United States currently leads all countries in ethanol production with nearly 13.9 billion gallons per year in 2012 (Brazil is next with an estimated 7.3 billion gallons).  The industry grew 720% between 2000 and 2010, with strong foundational support from an even stronger agricultural lobby.  From a pure growth perspective, it has been hailed as the most significant success story in American manufacturing.

But despite ethanol’s rapid rise in the United States, the industry has faced significant backlash in recent years.  This opposition has stoked heated debate both inside and outside the industry.  From contributing to increases in food prices, causing indirect land use change (ILUC), and exacerbating efforts to reduce greenhouse gas (GHG) emissions, first generation ethanol has become a punching bag for environmentalists and tech-oriented clean energy enthusiasts alike.

Policy momentum has shifted as well.  The revised Renewable Fuel Standard (RFS2) administered by the Environmental Protection Agency (EPA) capped corn starch-derived ethanol at 15 billion gallons per year, shifting support to advanced biofuels derived from cellulose and other non-food resources.  VEETC, a key tax credit that played an instrumental role in the industry’s growth over the past decade, lapsed in 2011.

Lacking goodwill and facing a sluggish economy, growth within the industry has dropped off considerably in recent years from its 2008/2009 high.

Despite a precipitous drop-off in plant construction, existing ethanol facilities in the United States could provide fertile ground for the next wave of clean energy expansion.  With an estimated $45 billion in subsidies granted by the U.S. government over the past 30 years and more than $30 billion worth of steel already sunk by major players like Valero, ADM, and POET, the greatest near-term biofuels opportunity is likely to lie in brownfield plant conversions and retrofits rather than greenfield builds.  Gevo’s recent success suggests that we are likely at the bottom of this next innovation cycle.

As I’ll highlight in Pike Research’s upcoming Scaling the Bio-Based Economy webinar, emerging business models are demonstrating that existing ethanol assets provide a platform for the integration of a host of Smart Energy technology systems.  Bio-digesters, for example, can process waste streams into biogas for onsite power generation and process wastewater.  Companies like Lanzatech and algae producers such as Algae-Tec are seeking to prove that the waste carbon dioxide produced by ethanol facilities can be used to produce advanced biofuels and renewable chemicals.  Meanwhile, the integration of combined heat and power (CHP) technology offers plant managers the ability to consume energy more efficiently.

The world’s biggest cities are sometimes described as having an “urban metabolism,” akin to living entities that consume energy, food, water, and other raw materials and expel waste.  Via a well-planned web of municipal infrastructure, a streamlined urban digestive system enables economic advancement, growth in development, and population expansion by improving public health and the surrounding urban environment.

But even efficient digestive systems have their limits.  Over the last several hundred years, one of the defining measures of how far a city has advanced has been its ability to distance its inhabitants from trash, excrement, and emissions.  With more than half of the world’s population living in cities today, and megacities – defined by the UN as metropolitan areas with populations exceeding 10 million – on the rise, this out-of-sight, out-of-mind “Waste 1.0” paradigm is facing significant limits.  As urban entities gorge themselves on resources, the sheer volume of trash, limited geographies, and sustainability efforts are causing the urban digestive system to back up.

For cities faced with this predicament, treating waste as a strategic resource, a strategy I call Waste 2.0, is quickly becoming an enabler of urban growth.  Last year 3.7 billion urban dwellers produced an estimated 2 billion tons of municipal solid waste (MSW) and 375 billion gallons of wastewater, both lucrative potential sources of energy-rich biomass.  When this unprocessed waste is shipped to far away landfills in developed economies or dumped in open pits throughout much of the developing world, the energy potential contained in waste is vastly underutilized.

MSW, a primary urban biomass resource, satisfies one of the key requirements for bioenergy deployment: aggregation of biomass in sufficient quantities to allow for projects to be deployed at scale.  Accordingly, a slew of companies are advancing projects that convert waste to useable energy in the form of power, heat, and fuels for onsite consumption.  At Heathrow, in the United Kingdom, for example, Solena Group is partnering with British Airways to convert trash generated by London’s residents into biojet for use in commercial flights.  Plasco Energy Group is also targeting MSW, but aims to produce electricity for onsite generation.  Fleets of buses throughout Sweden, meanwhile, run on renewable natural gas produced in anaerobic digesters processing organic waste.

For projects targeting MSW, however, securing a consistent steam of garbage is only half the battle.  In some cases, MSW must be separated from inorganic components in order for conversion to be viable.  Although waste can be source-separated at the point of conversion, this can add significant cost.  Accordingly, Waste 2.0 is also about crowdsourcing separation of waste components at the upstream source in order to decrease the cost of technology deployment.  From dedicated waste bins for separate streams (e.g. recycling, compost, landfill) to pneumatic waste collection systems, Waste 2.0 is as much a cultural challenge and a behavioral shift as it is a technological chore.

The European Union has shown that viable Waste 2.0 projects will require a combination of political will fueled by a strong waste management policy framework, economic will fueled by high electricity or fuel prices, and grassroots will fueled by streamlined waste collection infrastructure to facilitate technology deployment around waste.

The last leg of the stool, requiring a cultural shift from the Waste 1.0 paradigm, is perhaps the greatest challenge to increased waste utilization in urban centers.  In regions like Asia Pacific, for example, where opportunities to capitalize on waste streams show the greatest opportunity, the ability of local governments to win over their public by branding or selling the idea of utilizing MSW will have a significant impact on the rate of technology deployment.  In order for urban dwellers to get a little closer to their trash, Waste 2.0 will require herculean efforts to educate the public, but will maximize sustainable growth throughout fast-growing advanced and developing cities.

It is the odorless and invisible 500-pound gorilla in the room.  Currently hailed as the antidote to U.S. energy insecurity and a bridge fuel for the 21st century, natural gas is every bit as fossil as its coal and petroleum cousins.  But for clean energy, which is coming off a stimulus-fueled high and $100-dollar-plus oil run, could it be a death knell?  My colleague Kerry-Ann Adamson has looked at this question from the point of view of Smart Energy overall.  In my world of bioenergy, the accelerating development and availability of biogas, a renewable form of natural gas, indicates that natural gas surge could actually hasten the transition to clean energy, not impede it.

In 2009, the U.S. passed Russia to become the world’s largest producer of natural gas.  Estimates suggest that at 2010 consumption rates, the U.S. has enough recoverable natural gas resources to supply over a century of use.  Meanwhile, the Nymex price has dipped below $3 per million British thermal units (MMBtu), down from nearly $14 four years ago.  The glut has analysts in the U.S. scrambling to recalibrate energy forecasts and renewable energy project developers searching for new off-take partners to make project economics pencil out.

The boom in shale gas has stripped renewable energy of two of its key arguments: that a heavy reliance on fossil fuels is 1) contributing to irreversible climate weirdness; and, since these fossil fuels tend to come from nefarious nations, 2) making the United States increasingly energy insecure.  With respect to mitigating climate change, studies point to natural gas being less carbon intensive than coal and potentially oil as well.  As for energy security, the sudden bounty of domestic carbon is fuelling what could be a huge shift in U.S. transportation fuel, away from petroleum-based fuels to compressed and liquid natural gas, and potentially hydrogen and fuel cells, longer term.

Crossing the Biogas Bridge

Many believe the natural gas bonanza may be a transition fuel for the larger clean energy transformation.  John Podesta, former chief of staff to ex-President Bill Clinton and now head of the Center for American Progress in Washington writes that natural gas can serve “as a bridge fuel to a 21^st-century energy economy that relies on efficiency, renewable sources, and low-carbon fossil fuels.”

No renewable is in a better position to cross this bridge first than biogas.  Vastly underutilized, biogas is essentially natural gas that is produced in a matter of millions of seconds rather than millions of years.  The result of anaerobic digestion – a naturally occurring process in which bacteria feed on organic matter in the absence of oxygen – biogas is commercially produced in anaerobic digesters (AD) and landfill gas recovery facilities designed to treat biowastes such as manure, sewage, energy crops, and organic matter.  Currently, in the U.S., the economics for generating electricity from biogas are dismal.  But with emerging technologies, raw biogas can be stripped of carbon dioxide and other trace gases, bringing it up to the quality level of natural gas.

This renewable natural gas, essentially purified methane, is virtually identical to natural gas, but without the fracking.  It’s a fully fungible alternative, avoiding many of the blending constraints you see with an alternative like ethanol.  Leveraging natural gas infrastructure, it can be distributed as CNG, LNG, or in pipelines via gas-to-grid injection.  Although upgrading biogas to pipeline quality results in a fuel considerably more expensive than natural gas, biomethaneis starting to gain momentum in the U.S., particularly as a potential renewable fuel that can satisfy advanced biofuels mandates under the Renewable Fuel Standard (RFS2) and emerging Low Carbon Fuel Standards (LCFS).

The challenge for the biogas industry will be scaling up in economical ways.  As Pike Research’s analysis in our upcoming biogas report shows, one model that can reduce costs and concentrate supply is the development of community biogas hubs.  Using gathering infrastructure that is shared across several smaller-scale biogas producers linked via a pipeline network to an upgrading facility, upgrading costs can be defrayed among all producers.

Longer term, by leveraging shale gas infrastructure, biogas is poised to capitalize on a free ride to widespread scale up, a notion unheard of in many clean energy technology circles.  Should a massive natural gas infrastructure build-out take place to move shale resources to market, with significant untapped feedstock potential, biogas could emerge as a clean energy Cinderella story over the next decade.