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Disclaimer. After nearly 40 years managing money for some of the largest life offices and investment managers in the world, I think I have something to offer. These days I'm retired, and I can't by law give you advice. While I do make mistakes, I try hard to do my analysis thoroughly, and to make sure my data are correct (old habits die hard!) Also, don't ask me why I called it "Volewica". It's too late, now.

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Thursday, May 31, 2018

Rush to gas risks billions in stranded assets

There is a massive rush on in the USA to build new gas-fired power stations and the pipelines which will supply them.  Now, gas is a good complement to renewables, because the output from gas-fired power stations can be scaled up or down much more quickly than is the case with coal-fired power stations. That doesn't necessarily mean that gas is financially viable.  If you are only using a power station for part of the day, its average cost is higher because the costs of maintenance, depreciation, and interest/capital repayment have to be spread over a smaller output.  Which means that there is a big risk that batteries will soon be cheaper than gas because battery costs are falling by 20%+ per annum.  The Rocky Mountain Institute (RMI) has done some sums:

RMI’s The Economics of Clean Energy Portfolios notes that, in many cases, these gas plants are being built to replace the older generation, including aging coal and nuclear power plants. Over half the U.S. thermal generation fleet is more than 30 years old and expected to reach retirement by 2030, and RMI estimates that it would require $500 billion to replace all of these plants with gas generation. This would lock in a combined $1 trillion in asset and fuel costs.

This would also result in 5 billion tons of CO2 emissions through 2030, with that number increasing to 16 billion tons through 2050. With these emissions comes the release of methane (CH4), a far more potent greenhouse gas over 20 and 100-year timeframes.

None of this is necessary. RMI conducted case studies of four natural gas-fired power plants currently proposed for construction across the nation and found that in three of four cases, the optimized portfolios of renewable energy and other non-emitting resources could replace the gas plants at a lower cost. In the fourth scenario, RMI found that the clean energy portfolio would cost roughly 6% more.
Source: PV Magazine


These are at current costs for clean energy resources, and do not include a price on carbon. RMI found that when factoring in a modest $7.50 per ton cost of CO2 and expected price declines for distributed solar, clean energy is the cheaper alternative in all cases.

These clean energy options showed generally superior economics versus both combined cycle gas plants and combustion turbines, which have different use cases. Combustion turbines are typically used as “peaker” plants, running seldom and in times of high demand, wheres combined cycle plants tend to run more often as “mid-merit” plants.

The clean energy portfolios modeled by RMI have the ability to provide not just energy, but also the ancillary services required by the grid.

[Source: PV Magazine]

My guess is that most of these new gas plants planned for 2020 onwards won't be built.  Utilities are naturally conservative--they own assets with lifetimes of  3 decades or more; they have leveraged balance sheets; the regulators themselves are conservative; and we're all still feeling our way towards a 100% green grid, so aggressive jumps to new technologies are potentially very risky.  So right now they're choosing gas over storage, which may be a rational decision.  The trouble is, in 5 years, storage won't just be normal, it'll also be cheap--perhaps 1/4 its current cost. 

As RMI points out, the renewables alternatives are already nearly as cheap as or cheaper than gas.  In 5 or 10 years time, the cost advantage of green energy will be irresistible.  What will all these shiny new gas power stations and pipelines be worth then?

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