Study Warns that Gas Plants Could become Stranded Assets

Sept. 17, 2019
The Rocky Mountain Institute (RMI) warns that today’s rush to natural gas could lead to stranded assets as clean energy portfolios become increasingly cost-effective.

Utilities, investors and regulators should stop the rush to natural gas and choose clean energy portfolios (CEP) made up of combinations of solar, wind, storage, efficiency and demand response, warns a new report from the Rocky Mountain Institute (RMI).

If they don’t, many gas plants will become stranded assets, raising the specter that ratepayers will have to pay for them, said Chaz Teplin, a manager in RMI’s electricity practice.

“We’re hoping that regulators, utilities and investors think really hard about whether new gas plants are wise investments,” said Teplin.

To study this issue, RMI created computer models that compare the price of energy from natural gas plants to electricity from CEPs. The researchers optimized wind, solar, storage, efficiency and demand response in ways that ensured these portfolios meet peak demand and produce the same amount of energy each month, he explained.

The report, ‘The Growing Market for Clean Energy Portfolios,” focuses on aggressive plans by utilities, investors and regulators to invest in natural gas plants, even as clean energy portfolios become less expensive than natural gas.

Colorado as example

Some regions are already moving to clean energy and retiring natural gas plants, Teplin said.

“Our home state, Colorado, is retiring coal plants early and is doing it without doing new gas,” Teplin said. “They’ve stated their goals of reducing emissions by 80%, and they are happy to do that because when they went to market for solar, wind and storage, the costs had gone so low that they were excited to go that route.”

The cost of a CEP equivalent to a combined-cycle gas plant has fallen by 80% since 2010 and now undercuts the cost to build and run a typical new gas-fired power plant, said the report.

These results do not assume any cost of carbon emissions from gas plants or associated carbon taxes that would make the cost advantage of clean energy portfolios even larger.

By the mid 2030s, the cost of building a new CEP will be lower than the cost to operate an existing gas-fired power plant, according to RMI.

“For the first time, the rapidly falling costs of renewables and batteries are allowing optimized combinations of these resources…to systematically outcompete gas-fired generation on a cost basis while providing all the same grid services,” said the report.

RMI used a region-based approach to compare traditional gas-fired generation with CEPs, and estimated the reductions in expected gas use that resulted from choosing cost-effective CEPs. The report concluded that the less expensive CEPs would lead to stranded gas assets.

The dispatchability challenge

Other studies have shown that on a dollar-per-megawatt (MW) basis, solar and wind are cheaper than gas, Teplin noted. But what makes this study unique is how it responds to criticism that gas is dispatchable, and therefore can be used any time, while renewables are not always dispatchable and are therefore less reliable.

“So what we’ve done is try to say, ‘When is the energy needed, how will that gas plant actually be operated?’ and then combine the clean energy technology components to mimic that usage pattern,” Teplin said.

In creating their model, the RMI researchers asked themselves when peak demand occurs in a particular region, and tried to project that into the future.

“We expect peak demand to fall on the same days and require the portfolios to provide power at that time,” Teplin explained.

Four main conclusions of RMI study

The study reached four main conclusions. First, the CEPS are lower cost than over 80% of proposed gas-fired power plants in the focus regions. Second, if the proposed gas plants are built, the decreasing costs of clean energy will likely lead to over 70% of planned capacity being uneconomic by 2035. Third, competition from clean energy will nearly eliminate expected demand growth for gas from the power sector. Fourth, lower-than-expected demand will increase the per-unit cost of gas from newly built pipelines.

Graph courtesy Rocky Mountain Institute

“The story doesn’t end in 2019,” said Teplin. “The cost of renewables and storage has been coming down so fast for ten years, and they’re not going to stop coming. As that happens, it makes continued investments in gas less and less viable.”

Even if demand response is not included, and if prices continue along historical trajectories instead of the conservative cost declines that are predicted by analysts, wind, solar and storage will outcompete natural gas very soon, said Teplin.

Given this analysis, RMI sees the growing investment in gas power plants and pipelines as troublesome.

At least $90 billion worth of new gas-fired power plants are planned for construction in the coming 10–15 year. More than $30 billion of investment associated with gas transmission projects is also planned, said the report.

Financial implications dire

“The financial implications for gas pipelines of clean energy outcompeting gas power plants are dire, but where the ultimate risk lies depends on the contract and off-take structure for a specific pipeline,” said the report.

In many cases, customers of regulated gas and electric utilities will bear the risks of investment today in pipelines and power plants that are likely to become uneconomic sooner than anticipated, the report said.

And with that dire warning, the report urges regulators, utilities and investors to creep — not rush — to gas. The report suggests instead using open, technology-neutral planning processes to choose investments in the most economic options.

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About the Author

Lisa Cohn | Contributing Editor

I focus on the West Coast and Midwest. Email me at [email protected]

I’ve been writing about energy for more than 20 years, and my stories have appeared in EnergyBiz, SNL Financial, Mother Earth News, Natural Home Magazine, Horizon Air Magazine, Oregon Business, Open Spaces, the Portland Tribune, The Oregonian, Renewable Energy World, Windpower Monthly and other publications. I’m also a former stringer for the Platts/McGraw-Hill energy publications. I began my career covering energy and environment for The Cape Cod Times, where Elisa Wood also was a reporter. I’ve received numerous writing awards from national, regional and local organizations, including Pacific Northwest Writers Association, Willamette Writers, Associated Oregon Industries, and the Voice of Youth Advocates. I first became interested in energy as a student at Wesleyan University, Middletown, Connecticut, where I helped design and build a solar house.

Twitter: @LisaECohn

Linkedin: LisaEllenCohn

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