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.
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.
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.
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 Teplin, 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.