Natural gas has been an investment darling for some time now, but environmentalists have had decidedly mixed feelings for this relatively new energy source. While, on the one hand, natural gas emits far less greenhouse gas than do coal and oil, it's still a fossil fuel that contributes more to climate change than do clean energy sources such as wind and solar. The jury is still out on the safety of fracking, too. Because the energy investment case is so deeply linked to climate matters, long-term investors would be foolish to ignore these concerns.
Fortunately, there's a strong framework within which natural gas would keep greenhouse gas emissions low and portfolio returns high for years to come. The Center for Climate and Energy Solutions (C2ES) published a report recently that analyzes the climate challenges and opportunities the natural gas boom poses. "Leveraging Natural Gas to Reduce Greenhouse Gas Emissions" spells out how natural gas can be a tool for constraining climate change, so long as additional measures are pursued in tandem.
The death of coal
Natural gas has already helped to put a dent in the U.S.' greenhouse gas emissions, which have declined to mid-1990s levels. The shift is in part thanks to a transition away from coal toward natural gas, which emits just half the carbon dioxide that coal does.
C2ES cautions, though, that natural gas is not carbon-free, and that investment in a diverse energy supply is critical. This is very much in keeping with other experts' views on how to move toward an energy system that can support population growth and development while increasing resilience to shocks.
21st century energy stocks
If C2ES' model plays out -- and I think it may, as it complements a growing movement toward a new energy paradigm -- then some companies look poised to be part of the solution.
The U.S. has barely dipped its toe in the water when it comes to using natural gas to power transportation. A shift from diesel and gasoline to natural gas for fleet vehicles and heavy-duty trucks would yield significant emission reductions. Clean Energy Fuels (NASDAQ:CLNE) is leading the charge with America's Natural Gas Highway project. With abundant domestic natural gas reserves and tremendous advances in engine technology, Clean Energy Fuels sees huge opportunity, particularly in the heavy-duty market.
C2ES sees combined heat and power (CHP) systems as key to promoting manufacturing growth while reducing emissions. CHP, or cogeneration, is the production of two kinds of energy -- usually electricity and heat -- from a single fuel. Natural gas or diesel drives these systems. When natural gas is used, efficiency is high and emissions low, making the technology extremely attractive. Cummins Power Generation, a division of Cummins (NYSE:CMI), makes CHP systems from as small as 30 kilowatts to more than 100 megawatts. CHP remains expensive and faces regulatory hurdles, according to C2ES, and is still in its early stages of development, but it holds serious promise. Cummins notes that CHP can save its customers up to 35% on overall energy costs.
C2ES promotes policies that encourage development of distributed generation technologies. Distributed generation is simply the production of electricity where it is used, rather than at large central stations that require distribution across vast wire networks. Here again, C2ES is one of a growing chorus of voices that see this as the wave of the future.
Mircroturbines are an important distributed generation technology. CenterPoint Energy (NYSE:CNP) installed its first one in 2000, and now includes microturbines among its offerings to commercial customers. Indeed, CenterPoint is heavily invested in natural gas in general and would be among the likely beneficiaries of broader natural gas adoption.
Watch out for risk
C2ES cautions, though, that natural gas is methane, itself a far more potent greenhouse gas than carbon dioxide. Natural gas producers must do a better job of preventing leakages -- known as fugitive methane emissions -- if the fuel is to be part of the solution instead of the problem. Right now, it's hard to distinguish which companies are doing better than others here. None disclose their emission rates, largely because measurement techniques are still under development.
However, some are clearly more engaged than others. Encana (NYSE:ECA) and Talisman Energy (UNKNOWN:TLM.DL) have joined seven other natural gas producers to team up with the Environmental Defense Fund at the University of Texas at Austin to estimate their methane emission rates. It's too soon to know what they will do with this information, but the very fact that they're participating suggests that they intend to manage the problem.
All in all, the immediate future looks bright for natural gas, so long as it's deployed thoughtfully as part of a diverse energy mix. Sounds a lot like how to manage a portfolio.
Sara Murphy has no position in any stocks mentioned. Follow her on Twitter @SMurphSmiles. The Motley Fool recommends Clean Energy Fuels. It recommends and owns shares of Cummins. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.