Ivanpah

Ivanpah Solar Power Facility. Image source: Craig Dietrich via Flickr.  

While natural gas prices are currently very weak because of tepid demand and abundant supplies, that could change in the years ahead. One often overlooked reason is because of how important natural gas is for supporting renewables. This was a trend natural gas pipeline company Kinder Morgan (NYSE:KMI) recently detailed on its quarterly conference call.

Old reliable
On that call, Kinder Morgan founder Richard Kinder laid out his case for the importance of natural gas to America's future. One of the four big drivers of future natural gas demand he pointed out was its increased use for electricity generation, with there being three drivers of this demand: growth in electricity demand, the replacement of retired coal plants, and as a backup to renewable power. It's that last one that is often overlooked, but it was something Kinder spent some time detailing on the call:

Now renewables get a lot of attention, and they should, but let me put them into perspective. To be frank about it, they're small and less reliable. Wind and solar combined generated less than 5% of total U.S. generating load in 2014. And an indicative of the lack of reliability ... [last year the] capacity utilization for wind was 34% and solar 28%. Now that should not come as a surprise to anybody of any common sense, because we should realize that the sun doesn't shine all the time, and the wind doesn't blow all the time, but some people have apparently neglected that understanding. But what this really means is that reliable flexible natural gas facilities are absolutely necessary to back up wind and solar.

In other words, because wind and solar tend to operate at much less than installed capacity due to intermittent wind or lack of sunshine, they need a back-up to ensure reliable electrical generation to the grid. The back-up of choice by utilities is natural gas because it can to provide baseload power while flexibly working in conjunction with renewables.

Powering the west
This is leading to a projected steady growth for gas generation alongside renewables. We can see the correlation in the following chart from the U.S. Energy Information Administration, which projects that gas and renewable generation in the Western U.S. will rise nearly in lock-step:

Gas And Renewables

Source: EIA.  

The EIA notes two catalysts for the growing use of gas to generate power in the western U.S. First, the region has direct access to fast-growing gas-producing basins such as the Niobrara, Williston, and the Permian Basins, and because of this, natural gas production will increasingly be used locally to power the region. In addition to this, the EIA notes:

Natural gas-fired generation in WECC (Western Electricity Coordinating Council) grows alongside renewable generation, as requirements in renewable portfolio standards also necessitate additional generation to complement renewables for load-balancing purposes, particularly in California, for which natural gas is the most commonly used fuel.

A perfect example of this necessity is found at the Ivanpah Solar Power Facility in the California Mojave Desert, which is co-owned and operated by NRG Energy (NYSE:NRG). The facility, which came online in 2014, uses mirrors to focus heat on three boilers that are mounted on three towers. Those boilers make steam, which then generates electricity.

The Ivanpah plant uses natural gas as a supplemental fuel to keep heat in the systems at night and when it's cloudy. In 2014, it burned enough natural gas that, if used at a conventional power plant, would generate enough electricity to power 17,000 homes, or roughly a quarter of Ivanpah's total electricity generation for that year. In fact, the unit has consumed much more gas than initially expected, which forced regulators to change a rule that had limited its gas volume at 5%; they increased the volume limit to 38%.

This substantial use of gas is one of many reasons this particular plant has been heavily criticized for not being as green as advertised.

Investor takeaway
The growth of renewable power generation is really dependent upon natural gas, because when utilities such as NRG Energy build a big solar project, they need to have a back-up source of power, and natural gas is really the only choice because it is cheap, cleaner, and abundant. That means more gas flowing through Kinder Morgan's pipelines, which is just fine with Richard Kinder, because he is agnostic on what the gas is used for.

Matt DiLallo owns shares of Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan and long January 2018 $30 calls on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool owns shares of NRG Energy. 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.