TODAY’S STUDY: New Energy Portfolios As Power Plants
The Economics Of Clean Energy Portfolios; How Renewable And Distributed Energy Resources Are Outcompeting And Can Strand Investment In Natural Gas-Fired Generation
Mark Dyson, Alexander Engel, Jamil Farbes
Executive Summary
The current rush to gas in the US electricity system could lock in $1 trillion of cost through 2030 The US power grid is the largest, most complicated, most expensive, and likely the oldest continually operating machine in the world, but it is not aging gracefully. The grid has fueled the US economy for over a century, but requires significant reinvestment to maintain the same level of cost-effective, reliable service for the next century. In particular, the fleet of thermal power plants that convert fuel to electricity is aging, with over half of thermal capacity more than 30 years old and expected to reach retirement age by 2030.
Recent advances in power plant technology and the currently low price of natural gas mean that new natural gas-fired turbines are more efficient and less costly to run than aging power plants. This has led to a “rush to gas,” with utilities and independent power plant developers having announced plans to invest over $110 billion in new gas-fired power plants through 2025. Extrapolating this trend to 2030 suggests that over $500 billion will be required to replace all retiring power plants with new natural gas-fired capacity. This will lock in another $480 billion in fuel costs and 5 billion tons of CO2 emissions through 2030, and up to 16 billion tons through 2050.
“Clean energy portfolios” represent a promising alternative to new gas-fired power plants
Natural gas-fired power plants are not the only resource options capable of replacing retiring capacity. Renewable energy, including wind and solar, and distributed energy resources, including batteries, have fallen precipitously in price in the last 10 years. At the same time, developer and grid-operator experience with these resources has demonstrated their ability to provide many, if not all, of the grid services typically provided by thermal power plants. Together, these technologies can be combined into “clean energy portfolios” of resources that can provide the same services as power plants, often at net cost savings.
Clean energy portfolios are cost-competitive with proposed natural gas-fired power plants in four diverse case studies from across the US
This study compares the costs of four natural gas-fired power plants currently proposed for construction across the US against optimized, region-specific clean energy portfolios of renewable energy and distributed energy resources (DERs) that can provide the same services. We analyzed two announced combined-cycle gas turbine (CCGT) power plants, planned for high capacity-factor operation, and two announced combustion turbine (CT) power plants, planned for peak-hour operation.
In only one case did we find that the net cost of the optimized clean energy portfolio is slightly (~6%) greater than the proposed power plant; in the other three cases, an optimized clean energy portfolio would cost 5–60% less than the announced power plant. Factoring in expected further cost reductions in distributed solar and/or a $7.50/ton price on CO2 emissions, all four cases show that an optimized clean energy portfolio is more cost-effective and lower in risk than the proposed gas plant.
Low-cost clean energy portfolios threaten to strand investments in natural gas-fired power plants
In addition to competing with proposed gas-fired power plants on a levelized cost basis, clean energy portfolios will also increasingly threaten the profitability of existing power plants. Comparing the future operating costs of the two proposed CCGTs in this study against new-build clean energy portfolios, we find that, depending on gas price forecasts, the clean energy portfolio’s levelized, all-in costs will fall below marginal operating costs of the CCGTs well within the planned operating lifetime of the proposed plants. In other words, the same technological innovations and price declines in renewable energy that have already contributed to early coal-plant retirement are now threatening to strand investments in natural gas.
To mitigate stranded asset risk and minimize ratepayer costs, investors and regulators should carefully reexamine planned natural gas infrastructure investment
Our analysis reveals that across a wide range of case studies, regionally specific clean energy portfolios already outcompete proposed gas-fired generators, and/or threaten to erode their revenue within the next 10 years. Thus, the $112 billion of gas-fired power plants currently proposed or under construction, along with $32 billion of proposed gas pipelines to serve these power plants, are already at risk of becoming stranded assets. This has significant implications for investors in gas projects (both utilities and independent power producers) as well as regulators responsible for approving investment in vertically integrated territories. In both regulated and restructured electricity markets, there is a significant opportunity to redirect capital from uneconomic, risky investment in new gas toward clean energy portfolio resources, at a net cost savings.
» $93 billion of proposed investment is at risk for merchant gas power plant developers
»Approximately 83% of announced gas projects are proposed for restructured markets, where independent power producers bear market risk if these assets see their revenue fall under competition from renewables and DERs.
»Investors should reassess the risk profiles of gas projects and, in particular, consider the reduced useful lifetimes of gas-fired power plants under competition from clean energy resources, to mitigate the erosion of shareholder value.
» Ratepayers face $19 billion of locked-in costs
» The remaining 17% of gas-fired power plants proposed are in vertically integrated jurisdictions, where state-level regulators are responsible for approving proposals to build new gas plants and for allowing utilities to recover costs through customer rates.
» To avoid the risk of locking in significant ratepayer costs for gasfired resources that are increasingly uneconomic, regulators should carefully consider alternatives to new gas power plant construction before allowing recovery of costs in rates.
Clean energy portfolios represent a $350 billion market opportunity for renewables and DERs through 2030
The emerging cost-effectiveness of clean energy portfolios versus new gas suggests a significant opportunity to offset a majority of planned spending on new gas plants, and instead prioritize investments in renewables and DERs, at a net cost savings on a present value basis. This investment trajectory would unlock a market for renewables and DERs many times larger than today’s, minimize risk to investors, enable net cost savings for American electricity customers, and reduce carbon emissions by 3.5 billion tons through 2030. This estimate excludes any value of DERs to the distribution system beyond peak load reduction, any value of avoided fuel price risk, and any cost on carbon emissions; including these factors could increase the addressable market and savings potential significantly.
Current regulatory incentives, market rules, and resource planning processes limit the ability to capture the full value offered by clean energy portfolios
Clean energy portfolios represent a cost-effective alternative to investment in new gas-fired power plants, with a potentially accessible market in the hundreds of billions of dollars through 2030, while avoiding the fuel price risks and CO2 emissions associated with new natural gas power plants. However, the industry is just beginning to recognize and capture the benefits of these resources, and execution of clean energy portfolio projects remains relatively low compared to their potential. Coordinated action by several stakeholder groups can accelerate adoption.
Recommendations
For regulators and market operators: Study alternatives and level the playing field.
• Seek broad input: Solicit input from alternative solution providers as part of the approval process for proposed power plant investments
• Align incentives: In states with ratebased generation, adjust utility earnings incentives to put clean energy portfolios on a level playing field with traditional capital investments by rewarding least-cost resources more effectively than does the traditional return-on-capital business model
• Open up market participation: In restructured markets, allow participation of distributed resources in wholesale market products historically designed with thermal generators in mind
For utilities: Revolutionize resource planning and procurement processes.
• Update planning: Accurately reflect system needs and the capabilities and potential of clean energy portfolio technologies, including distributed and demand-side options, to meet those needs
• Scale deployment quickly: Limit pilots of already-proven technology, and move quickly toward scaled deployment
• Procure solutions: Request technologyneutral solutions from the market, and move toward standard tariff- or market-based incentive structures to procure them
For technology providers and project developers: Offer holistic, low-cost solutions to meet grid needs.
•Integrate multiple technologies: Where utilities seek or markets support turnkey alternatives to gas plants, partner across vendors to optimize bids and deployment accordingly
• Drive down costs: Leverage technology to reduce the costs of system design, customer acquisition, operational integration, and other “soft” costs
• Generate confidence: Work with planners and system operators to characterize discrete grid service needs, including measurement and verification, and validate performance characteristics of portfolio technologies
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