Natural Gas Power Stranded Asset Risk Reaches a Tipping Point

Investment risk in new and proposed natural gas power plants is on the rise. The risk of them becoming stranded assets has reached a tipping point, according to two companion reports produced by the Rocky Mountain Institute (RMI).

Sharp declines in the costs and improving performance of clean energy portfolios (CEPs) that include solar and wind power generation, battery energy storage, energy efficiency and utility-customer demand-side response (DSR) by and large have driven the cost-competitiveness of CEPs below that for new natural gas power plants and electricity across the U.S. That includes investments in the latest, highest efficiency combined-cycle power plants, especially new “peaker” plants designed just to start up quickly and meet sudden, unexpected shortfalls in grid supply or spikes in demand, RMI highlights in The Growing Market for Clean Energy Portfolios and Economic Opportunities for a Shift from New Gas-Fired Generation to Clean Energy Across the United States Electricity Industry.

Percent of Proposed Combined-Cycle Gas Turbines (CCGTs) Facing Stranded Cost Risk in Each Year 2020–2040
Percent of proposed combined-cycle gas turbines (CCGTs) Facing stranded cost risk in each year 2020–2040
Source: The Growing Market for Clean Energy Portfolios and Economic Opportunities for a Shift from New Gas-Fired Generation to Clean Energy Across the United States Electricity Industry (RMI report)

Tens of billions of dollars could be at risk and the prospective losses to natural gas power investors, utilities, their customers and investors will mount going forward given fluctuating, at times highly volatile, natural gas prices and continuing improvement in the overall cost and performance of CEP assets, according to the report authors. That should give utilities and their investors, as well as government and regulatory authorities, concerned about rising greenhouse gas emissions (GHGs) and the increasing incidence, intensity and costs of extreme weather events cause to reconsider making any new investments in new natural gas power generation, or following through on existing plans to add new capacity.

A stranded, natural gas power plant tipping point

It will be less expensive to operate new solar and clean energy portfolios than 90% of the proposed combined-cycle natural gas power capacity slated to come online by 2035—some 68 gigawatts’ (GW) worth, according to RMI’s analysis. And that assumes the pace of clean energy cost declines will slow dramatically and doesn’t consider the impact of prospective climate or renewable energy policies.

Natural gas power plant owners will not be able to cover debt payments or generate returns on equity to investors if clean energy portfolios can be built at costs cheaper than natural gas power capacity. The magnitude of potential losses from what turn out to be stranded assets is likely to reach tens of billions of dollars in the 2030s, the report authors highlight.

Historical and Projected Evolution of CEP Costs
Historical and projected evolution of CEP costs
Note: The “kink” in the in the CEP cost curve in 2018 reflects the difference between historical cost decline rates for renewables and storage, and the much more moderate future cost decline rates predicted by technology analysts.
Source: The Growing Market for Clean Energy Portfolios and Economic Opportunities for a Shift from New Gas-Fired Generation to Clean Energy Across the United States Electricity Industry (RMI report)

The cost of building clean energy portfolios has dropped about 80% over the course of the past decade, reaching a tipping point at which it’s now cheaper to build and operate them than it is new combined-cycle natural gas power plants, according to RMI. Consumers would save more than $29 billion if clean energy portfolios were built and operated instead. Furthermore, carbon dioxide (CO2) emissions would be reduced by 100 million tons annually, which is equivalent to about 5% of present-day power sector emissions.

That’s not the case when comparing the cost of building new clean energy portfolios as compared to that for continuing to operate existing natural gas power plants, at least not at present, Chaz TeplinSolar Magazine Interviewee Avatar, reports’ co-author and manager of RMI’s electricity practice, told Solar Magazine. That’s likely to change sooner rather than later, however, he added.

There are other significant advantages to investing in clean energy portfolios as opposed to new gas-fired generation capacity, the report authors continue. A natural gas power plant is a single, large energy asset that requires one, lump-sum capital expenditure and relies on a single fuel source, they offer as an example.

Clean energy portfolios, in contrast, are modular. “If one component is more or less expensive than expected, it is possible to ‘reoptimize’ the portfolio composition,” they explain. “Building smaller CEPs as needed diversifies and enhances the financial risk profile,” Teplin said.

Building diversified clean energy portfolios

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Integrating battery energy storage is an essential aspect of building clean energy portfolios, the researchers continue. “Storage is necessary in all cases because it addresses the intermittent nature of renewables, such as solar and wind energy. All the clean energy portfolios [in the analysis] include storage, some more than others. Storage is more valuable, and plays a larger role, when comparing clean energy portfolios to peaker plants. Peaker plants provide flexibility, but batteries are the most flexible,” Teplin said.

Then there are additional ways to enhance the economics and returns of clean energy portfolios, by incorporating energy efficiency and the flexibility of demand-side response in them, for example. “There’s a growing market for CEPs, aided strongly by energy efficiency and demand-side flexibility. The details of how those programs get laid out are an opportunity for energy services providers, esp demand-response providers, to consider them in their solutions and in doing so work with utilities to make these resources possible,” RMI electricity practice associate and reports’ co-author Grant GlazerSolar Magazine Interviewee Avatar said in an interview.

The researchers highlight a few such programs being carried out across the U.S. in a market snapshot. “Xcel Energy includes about 800 megawatts (MW) of energy efficiency programs in their new clean energy resource portfolio. Portland General Electric is also selecting a preferred resources portfolio that includes energy efficiency, demand-response and renewables,” Glazer offered as examples. In addition to pointing out that natural gas power plants are long-term assets that lock in CO2 and GHG emissions for 20 years or more, Teplin highlighted two key facets of the two, companion reports, which were carried out by a four-strong RMI research team over the course of a year as a follow-up to the work they did to produce RMI’s Economics of Clean Energy Portfolios. “Our primary focus was on proposed natural gas power plants. Decisions are still pending and we’re hoping to get ahead of that,” he said.

Second, the report authors zoom in on assessing the likelihood that proposed new investments in natural gas power generation capacity will become uneconomic in the 2030s—long before being paid off. “It’s not currently cost-effective to replace a natural gas power plant with a clean energy portfolio if the plant is already up and running, but that’s likely to change in the next five to 10 years,” Teplin elaborated.

RMI’s research team required clean energy portfolios to generate electricity on equal terms, with equivalent reliability and quality of service, as natural gas power plants. That distinguishes the two research reports from others, according to Teplin. “Gas is generally more valuable because it can deliver electricity on-demand. What we’ve done is to mimic the operation and performance of natural gas power plants. Even after requiring the clean energy portfolio to act just like the gas plant, we still find it [the CEP] is less expensive,” he explained.

Natural Gas Power Generation and Stranded Asset Risk

Changes in energy and climate change policies would be likely to have a huge effect on how the scenarios RMI’s research team produced and analyzed play out. The sensitivity analyses included in the report’s main body are based on existing renewable portfolio standards (RPS), for example. They also analyze future scenarios as a side case, Teplin noted.

When all’s said and done, it’s the financial uncertainty associated with relying on natural gas as a fuel source that makes a telling difference when comparing the costs and returns of new natural gas power generation to building clean energy portfolios, Teplin explained. “The cost of new clean energy portfolios will out-compete you as compared to natural gas generation because of uncertain, future natural gas risk. With wind, solar and storage fuel is free,” he said.

2019 marks the tipping point when building clean energy portfolios became cheaper than building new natural gas power plants, Teplin summed up.

“When you take a step back and take a look at the big picture over the past 10 years, and the next 20, it’s clear where things are going,” he said. “Very soon, the cost of building clean energy portfolios CEPs will out-compete natural gas generation. I think it’s true today, but it’s only going to become more true going forward.” comment↓


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