Ripple effect of gas prices

by Ian Page

Natural gas prices have risen significantly for a complex of reasons.

Either this is the long-term trend we anticipate (peak gas supposed to be 2021/22 some years ago) or just one of those things.

However, it gives us an insight into the effects.

The UK has relatively high gas prices and high volatility since it is at the end of the Russian pipelines and not in the EU - so shortages such as the current Russian reduction in gas supply, are multiplied since other countries take theirs first. There is some North Sea gas left but it’s diminishing. Finally, the UK gets LNG which is more expensive than piped gas normally because of the energy costs of liquefaction, transport cooling and regasification. In addition, one of the largest gas storage systems was closed last year reducing the strategic reserve and increasing volatility of prices

As a result, two of the UK's fertilizer plants closed and grid electricity prices are about to rise significantly. (As a lot of the UKs electricity comes from gas.) The government has allowed two old coal fired power stations to be restarted as a result (so much for COP26 hosting). We assume that the fertilizer firms decided that the large increase in input costs was not going to be handled by a large increase in fertilizer prices (UK farming is in a real post Brexit mess and unlikely to be willing to increase their fertilizer costs when they are fighting to survive)

Fertilizer plant inputs are natural gas and nitrogen. Nitrogen is extracted from air at some energy cost in refrigeration and heating.  The natural gas is steam reformed with water leading to hydrogen and CO2. The hydrogen is reacted with nitrogen at high pressures and temperatures (energy costs) to make ammonia and then further processed to ammonium nitrate fertilizer.

The CO2 is relatively pure and is sold to fizzy drinks makers and meat processors.

As a result, the high natural gas price has led to a shortage of fertilizer, and a shortage of fizzy drinks (no bad thing) in the UK. There is also a potential effect on the shortage of meat but that's already a problem due to a shortage of abattoir staff and trucks.

We can see that fertilizer production is (as we knew) very fossil energy intensive and costs are intimately associated with the price of natural gas.

In our thoughts on the hydrogen economy, replacing natural gas produced hydrogen (and its related CO2 emissions) with electrolytic hydrogen from renewable energy and hydrogen is a critical transition

The enthusiasts for hydrogen promise us that the cost of electrolytic hydrogen in 2030 will be equivalent to gas. However, if the price of gas is rising, and is also volatile resulting in factories being mothballed or closed either permanently or intermittently, it's entirely possible that electrolytically produced hydrogen, with a fixed price PPA from a solar or wind farm, would be economic much earlier. It might also be a way of smoothing out natural gas input prices by making it a smaller proportion of overall costs. The usual estimates rely on IEA predictions of the gas price and volume which are generally over optimistic towards fossils.

Some large companies already offer electrolysers, and the electrolyser market is growing so there may be a surge in demand now, followed by a shortage of supply soon. However, the increase in volumes may well bring forward the volume-based result of getting the cost down more rapidly.

This effect will be largest in countries like the UK with relatively expensive gas sources (e.g., Japan) and need for fertilizer, but it also needs a rapid expansion in renewable generation since, getting the electrolyser energy from the usual grid means that gas will have been burnt to generate the electricity removing the benefit and price advantage!

An alternative is for countries that would normally export LNG (taking the costs of refrigeration and transport off the sale value of the gas at destination), to use their gas directly to make fertilizer and export that instead. This would not save CO2. However, many of the exporting countries have fantastic cheap solar PV potential resources, and solar can be installed quickly, so they might feel that establishing a fertilizer export industry played to both their strengths and provided an easy transition to a future post gas era.

Countries like Iceland and Scotland that have excess renewables production, might also find that exporting fertilizer (or other high energy input materials) might provide higher added value for their energy resource as well as helping with the grid oversupply problem at high REN levels. This transition is going to be messy since the cheapest and fastest way to expand electrolysers are alkaline and not too keen on variable electricity inputs. However, the slump in ICE sales has resulted in a slump in palladium and platinum costs which are key to the higher performance more adaptable acid electrolysers. It feels as though if natural gas prices look as if they are staying high or increasing there could be a near term market for any type of electrolyser if they can be made in time!

Conclusion: 

1. High gas prices are good for advancing and forcing the transition away from natural gas derived hydrogen in all relevant industrial applications. This both reduces the amount of natural gas used and saves a lot of CO2 production (we can live without fizzy drinks!). 
2. The standard assumption that this will get moving in 2030, may be unduly pessimistic particularly in gas poor renewables rich countries.
3. Where fertilizer is made, and the trade paths may change towards using renewables where they are produced rather than transmitting the electricity long distances to where the fertilizer is needed.
4. If prices remain high the market for electrolysers will be huge before the currently anticipated schedule resulting in higher priced electrolysers having a good demand.

The current situation in the UK may be a guide to the post gas era.