Will gas or renewables be the future of US energy?

Yes.

To clarify: Renewables need gas to reach their potential. And gas can benefit from a more robust renewables sector, too.

Let’s start with a few facts. Although non-hydro renewables are growing fast, they are still a small part of the US power supply, accounting for just 6 percent of the total in 2013. Wind is the most important (4.1 percent), followed by biomass (1.5 percent), geothermal (0.4 percent), and solar (0.23 percent).Growth is brisk, however. In the first half of 2014, solar accounted for a quarter of new capacity and wind a sixth (gas accounted for more than half). In California, 98 percent of the 1,100 megawatts of new capacity added was either wind or solar. That’s pretty stunning. As for coal, while it is still the most important single contributor to the US energy supply (39 percent) and will remain crucial, it’s almost as stunning that no new coal plants were built over the same period. Unless there is a breakthrough in terms of “clean coal”—a Holy Grail that is still economically remote—coal’s relative importance will likely diminish, as gas and renewables grow faster.

Electricity is a tricky, trillion-dollar-plus business; it is also essential. Change is inevitable, but abrupt change is impossible simply because of scale. There is a ton of well-functioning (and expensive) infrastructure in place that relies on coal, gas, nuclear, and hydro; these account for 94 percent of the US power supply. Wishing it all away in a green-tinged dream of a renewable-only near future is not going to happen.

For one thing, the costs would be enormous. The National Renewable Energy Laboratory, for example, notes that an 80 percent-renewable electricity sector would require essentially an entirely new transmission grid. Any utility commissioner who has been slowly roasted over the public grill for months trying to get permission for a single new transmission line is having a good laugh at that idea. The power of NIMBY is positively nuclear in its intensity.

For another, right now it simply cannot happen. That’s because of the need for “baseload” power—that consumers be able to flip a switch and know that the television is going to come on. Wind and solar are inherently intermittent—the sun goes down every day and wind does not blow on demand. At the moment, there are no scalable, economical systems to store and then release surplus renewable energy. (Geothermal and biomass can provide baseload power, theoretically. But geothermal is site-specific and there is no way biomass can scale up to replace nuclear and fossil fuels.)

So there always needs to be a source of power available to, quite literally, keep the lights on. Gas is an increasingly appealing option; over the past seven years, gas has increased its market share by seven percentage points, while that of coal has gone down by 10 points—a large part of the reason for lower greenhouse-gas emissions in the US over that period. Gas can also be easily ramped up to meet peak demand and power surges—for example, when one part of the country is frying or freezing. Renewables can’t do that.

That is why I say renewables need gas. Gas is much cleaner than coal and carries less political baggage than nuclear (though heaven knows the fracking debate is fraught). In the US, gas is plentiful and cheap; thanks to the surge in shale production, costs are half what most analysts predicted in 2008. Renewables will lose support if consumers feel they cannot rely on them; gas is a cleaner way to enhance renewables’ reliability. That’s a good thing.

The rise of gas has also had positive indirect effects. According to data from the Federal Reserve quoted in the Financial Times, cheap gas has measurably boosted US manufacturing output, investment, and jobs. In addition to the visible job gains in the energy sector itself, there are also knock-on effects in services, construction and other sectors. By 2020, the McKinsey Global Institute has estimated, shale gas and oil could boost US GDP by up to $690 billion a year.

That matters, because a growing economy with a healthy manufacturing base is good for the long-term development of renewables. (To those who see economic growth as a problem—well, try selling that on Main Street.) When times are tough, people will resist paying higher power bills, regardless of the reason; a stagnant economy has fewer resources for investment. For development and deployment, then, renewables need a healthy economy. Gas has provided a useful booster shot in this regard.

But the larger reason that renewables and gas are good for each other is that what people and industry really hate is instability – prices that swing up and down, making it impossible to plan or budget. Having a wide variety of energy options reduces instability. Such diversification is becoming ever more plausible because the prices of renewables are coming down—by double digits for solar PV last year. That said,they are still more expensive in most places than gas, coal, or nuclear.

Closing the gap will take some time, but it will happen. McKinsey estimates that photovoltaic solar could achieve “grid parity” (ie, cost the same as conventionals) in most of the US by 2020. Wind is already close in many markets. Once grid parity is reached, experience has shown that adoption increases quickly. The implication is that renewables can be a useful hedge against fossil-fuel price spikes (and vice versa).

There is also an appealing complementarity at work in another sense. Gas plants are relatively cheap to build, but then have continuing costs in the form of having to buy inputs. Renewables, on the other hand, are relatively expensive to build, but then the fuel is free (wind or sunshine). Finally, more renewable consumption at home creates space for high-value gas exports abroad.

The entire history of global energy has been toward lower-carbon sources—from wood to oil to coal and now to gas.* I suspect the next few generations will see a similar trajectory; I also suspect that some of the renewable sources of the future will be things we may have not even heard of today, which is why it is important to continue to keep poking around for new ideas. In the meantime, though, factories need to keep humming, and people want to stay cool in the summer and toasty in the winter. Gas can be a bridge to whatever the future brings.

So forget the stereotypes: fossil fuel heavies versus green hippies. A forward-thinking and sustainable energy policy needs both.

This article is published in collaboration with LinkedIn. Publication does not imply endorsement of views by the World Economic Forum.

To keep up with Forum:Agenda subscribe to our weekly newsletter.

Author: Scott Nyquist is Director at McKinsey & Company

Image: The Cuadrilla drilling site is seen in Balcombe, southern England August 15, 2013. REUTERS/Gareth Fuller/Pool