Natural gas producers including Chesapeake Energy (CHKA.Q) and Devon Energy (DVN -0.89%) could soon have a huge new market to tap: do-it-yourself electricity.
Many American homes and businesses are going to be generating their own electricity in the years ahead. This trend will benefit gas producers because natural gas is the logical fuel for such home-based micro generators or micro turbines. Unlike solar panels, natural gas-burning generators don't shut down at night or on a cloudy day. They can also generate much more power than solar panels.
Some energy experts, including NRG Energy CEO David Crane, think do-it-yourself electricity, or "diffused generation," is the wave of the future. Crane has hired Dean Kamen, the man who invented the Segway, to develop a device called the Beacon 10. The Beacon 10 is a "home energy appliance" that is a combination furnace, water heater, and generator.
Natural gas as an alternative to the electric grid
The Beacon 10 uses a Stirling, or hot air, engine to run a generator that can provide up to 10 kilowatts of power. The appliance is being sold as part of a micro-grid that also contains battery backup and solar panels that can generate up to 5 kilowatts of electricity. That would indicate that natural gas can produce twice as much electricity as solar systems, which gives it an advantage.
Crane is currently peddling the Beacon 10 as a "backup to the electric grid," but it is easy to see it as a grid alternative. Nor is Beacon 10 the only natural gas-burning electric grid alternative out there. There's the Bloom Box that large companies such as eBay, Google, and Wal-Mart are deploying. The Box from Bloom Energy is a set of fuel cells that can run on natural gas.
A Maryland company called Redox Energy Systems has announced plans to market what it calls the Cube. The Cube is a natural gas-powered fuel cell system the size of a washing machine that weighs less than 1,000 pounds. Redox claims the Cube will generate 25 kilowatts of electricity, and it will be 90% cheaper to operate than existing fuel cells. If Redox's claims are true, the Cube would be the perfect do-it-yourself grid alternative for homes and businesses.
Why natural gas is the perfect grid-alternative fuel
Natural gas is the perfect fuel for such grid alternatives for two reasons. First, it is very cheap and getting cheaper. Last year natural gas prices fell to $2 per thousand cubic feet. In January prices spiked to around $6 per thousand cubic feet because of low temperatures, but that price was still less than half 2008 levels. On March 3 Bloomberg reported that natural gas for April delivery was trading at $4.492 per one million British thermal units, roughly a thousand cubic feet.
Second, natural gas is already piped into most of the homes and businesses in North America. The delivery system for it is already there, which gives it a tremendous advantage over gasoline, propane, or diesel fuel, which must be delivered by truck.
Natural gas could be cheaper than electricity
What's truly interesting is that natural gas is getting cheaper as the cost of electricity keeps going up and the supply of electricity falls. The Bureau of Labor Statistics reported that electricity costs increased by 1.8% in January, the highest increase since March 2010. If that wasn't bad enough, the U.S. Energy Information Administration reported that the nation was making less electricity than it did in 2007.
To add icing to the cake, the Nerdgraph website compiled a chart based on EIA figures that showed electricity costs in the U.S. will increase by 21% in the next 10 years and 51% in the next 20 years. If those predictions are true, at some point the cost of do-it-yourself electricity generated by natural gas could be lower than electricity from the grid.
At that point, do-it-yourself energy would become a viable alternative to the grid. If that happens, home-energy appliances will be all the rage. Everybody will be hooking up fuel cells or turbines to save money, and demand for gas will increase. The biggest beneficiaries will be companies like Chesapeake and EOG Resources, which are sitting on huge reserves of natural gas.
DIY electricity not guaranteed
There are some major hurdles to natural gas as a grid alternative. The main natural gas-burning do-it-yourself power plants, the fuel cells and the Beacon 10, are largely unproven technologies. Nobody knows if they will work as advertised, and safety concerns have yet to be addressed.
Then there are solar panels, which are a proven technology. Solar is already in the market, and it has been accepted by the public; fuel cells and Stirling engines have not. The leading solar company, SolarCity, installed 103 megawatts of solar panels in the fourth quarter of 2013, Reuters reported. The public accepts the idea of do-it-yourself electricity, but only if it is solar.
It remains to be seen if do-it-yourself electricity generated by natural gas is the future of power or not. Yet one thing is clear: Revenues for gas producers like Devon and Chesapeake are going up without the do-it-yourself electricity market.
