Bridge to nowhere: does natural gas energy have a future?

Heidi Vella 6 July 2020 (Last Updated July 7th, 2020 10:09)

As the cost of renewable energy falls and global economies set their sights on achieving net zero emissions targets, recent reports have found that up to $1tn of gas assets are at risk of being stranded. We find out more.

Bridge to nowhere: does natural gas energy have a future?
Lila Holzman, energy program manager at As You Sow

Emitting around half the CO2 of coal fired power plants, natural gas energy generation is often considered a ‘bridge’ fuel or a ‘stepping stone’ to lowering overall greenhouse gas levels from electricity generation. In fact, the fall in CO2 emissions in the US between 2007 and 2017 is largely attributed to the increased burning of gas instead of coal.

Furthermore, the flexibility of gas ‘peaker plants’, which can be turned on when extra capacity is needed, has actively helped integrate more and more intermittent renewable energy onto the grid. 

However, despite gas’ role in furthering decarbonisation in the energy sector, two recent studies have shown that costs and climate change targets may well mean that gas power plants are close to reaching the end of their usefulness. 

A report by Rethink Energy, published in March 2020, goes as far as to say that the falling cost of renewable energy technologies and emission reduction targets could result in investments in natural gas power generation leading to losses of $1tn by 2050. 

From as early as 2025, renewables-plus-storage projects in both wind and solar will undercut the levelised cost of energy of new gas-fired power plants, starting in Europe and Asia, before spreading to gas-producing nations, it notes. 

Another report, ‘Natural Gas: A Bridge to Climate Breakdown’, by US-based non-profit shareholder advocacy group As You Sow, states that there needs to be a clear end for natural gas or continued investment will contribute to distinct climate risks that threaten shareholder value.

Beginning of the end for natural gas?

Although renewable enabler, at least at first, the As You Sow report argues that investment in natural gas infrastructure, particularly in the US, is incompatible with decarbonisation goals set at the Paris Climate Accord in 2015. 

“Billions of dollars are poised for investment to build natural gas infrastructure throughout the United States. This investment drive, which includes power plants and pipelines with multi-decadal lifespans, is incompatible with maintaining a safe climate and often directly at odds with a company’s own net zero emissions ambitions,” says Lila Holzman, energy program manager at As You Sow. 

According to a 2019 report from Bloomberg, the top 10 energy companies are planning investments in gas approaching $1tn by 2030. It notes that if governments “make good on tough targets for cutting greenhouse gas emissions” much of that infrastructure could become abandoned. 

A 2018 report by the Intergovernmental Panel on Climate Change, which declared the world had a mere 12 years to halve its emissions or fail to meet the 1.5° global warming target, has added a sense of urgency to the task at hand. 

It prompted many, including heavy greenhouse gas emitters and entire countries, to set ambitious, long-term decarbonization targets. Xcel Energy, PSEG, Duke Energy, Dominion Energy, DTE, Arizona Public Service, and NRG have all set noteworthy net zero by 2050 emissions goals. 

However, Holzman says there are certain policies in place that incentivise utilities to keep business as usual and to continue building big gas infrastructure.

“They can still get good returns on these projects by passing the cost onto the customer,” she explains. “We want to see more information from the companies as to why they think the levels of natural gas build-up they have planned is necessary,” she adds. 

Cost factor: how soon will renewables become cheaper than gas?

The case for renewables with storage is becoming more compelling economically. Harry Morgan, lead analyst at Rethink Technology Research, says 2025 is the first year the firm expects renewables to undercut natural gas, initially in China.

“By 2030, it will be cheaper to install and run a new renewables and storage portfolio than it will existing gas turbines. The lifespan of this technology is 20-30 years, which takes you through to 2050 when Europe, in particular, is expected to be carbon neutral,” he says.  

“Having gas on the books is against that and, even if you ignore the environmental side, the economic argument alone should dispel the fact that natural gas can be used as a bridge fuel,” he adds. 

Data from Lazard, as highlighted in the As You Sow report, shows that unsubsidised solar plus battery storage is already, in some cases, cheaper than natural gas. For example, NV Energy, which in 2019 procured 1,200MW of solar at $20 per MWh and 580MW of four-hour battery storage for $13 per MWh. By comparison, the low-end average cost of gas estimated by Lazard from a natural gas-fired combined-cycle plant is $44 per MWh.

The ongoing Covid-19 pandemic, which has seen gas prices plummet, could potentially impact the levelling up of costs in the short term however.

Is divesting in gas realistic? 

Daniel Grosvenor, advisory corporate finance partner at Deloitte,  says there is a geographical split around the world regarding how natural gas is viewed and invested in. 

“Western Europe, including the UK, is very pro-renewables and pushing towards net zero decarbonising very quickly, whereas in the US decarbonisation at present is replacing coal plants with gas plants, though different states have different policies. Similarly, Asian economies, although they are building renewables, they are also building gas and coal quite significantly,” he says. 

The International Energy Agency’s 2019 World Energy Report noted that, since 2010, 80% of growth in gas use has been concentrated in three key regions: the United States, where the shale gas revolution was in full swing; China, where economic expansion and air quality concerns have underpinned rapid growth; and the Middle East, where gas is a gateway to economic diversification from oil.

Despite the falling cost and the urgency of decarbonising the energy ecosystem, fossil fuels, including gas, still provide 85% of the world’s energy needs. How will this be changed in such a relatively short frame? 

In large part, policy will determine the path for gas assets going forward. A carbon tax could accelerate the depreciation of their value, but the major players, Europe included, have been very slow in devising a meaningful system. In the US, Holzman says, it’s “not worth holding your breath for.” 

“I think a carbon tax would absolutely help accelerate and get us moving faster in the right direction,” she says. “We need policy to incentivise utilities, so far it has only emphasised the need to be risk averse because they provide an essential service.

“I think the directionality of the energy transition is set, the question of how quickly and what’s the scale and scope of that transition? I do think the US presidential candidate has an important role to play in that.”

In Europe however, Morgan anticipates the carbon tax will likely increase in the near future as the economic bloc looks to meet its net zero ambitions. 

Nevertheless, Grosvenor doesn’t believe gas and its function in the energy system can be so easily replaced. 

“It’s a really big task replacing what gas does, whether that’s for domestic heat or peaking plants to balance the system – I think that’s one of the really hard bits of the energy transition,” he says.

“Although people can say there are technological solutions, I’m not sure they’re necessarily equal solutions; we are seeing a number of batteries develop but not enough to replace gas in the system.”

Flexibility mechanisms such as smart charging for electric vehicles and demand-side response and energy storage are emerging in the US and Europe – EDF has stated its goal is to become Europe’s leading energy storage firm, aiming for 10GW of new capacity by 2035 – but it is still extremely nascent. 

Gas in the near-term

Going forward, Holzman says she would like to see more transparency around the investment modelling methods of large utilities in the US. 

“I think one other piece of the puzzle is how utilities model to determine their future need to meet demand. We need to make sure their models are not biased for gas and they look at the benefits of renewables and storage,” she explains.  

I think investors will increasingly question this, especially as we see some instances of gas plants retiring early or being rejected. I feel like the more examples of this there are, the more investors will pay attention,” she adds. 

In terms of the future direction of the finances, Morgan says Rethink has been conservative with their assumptions.

We’re seeing quite a few players starting to offload their gas assets and this will continue over the next five years; Xcel Energy, for example, is selling off theirs as quietly as possible. They’ll be offloading them to other utilities that think they can run them at a lower cost,” he says.

“There needs to be more transparency around these natural gas projects, however, especially if they’re going to last their lifetime; they will likely have to be propped up by taxpayer finances and I think that’s what we could see happen more and more.”