The U.S. power mix is rapidly changing, but utilities still want the same thing — a resource mix that delivers the most reliable and safe electricity to customers at the lowest price.
Despite pronouncements from the White House, that preferred mix is no longer a portfolio based largely on coal and nuclear energy. Both those resources have seen their market share undercut by cheaper natural gas in recent years, pushing many of the oldest and least efficient plants offline.
Natural gas may fall victim to a similar situation within the typical two-decade utility planning horizon, according to new research.
“For decades, utility planners have used the portfolio approach to power system planning and for their integrated resource planning (IRP),” RMI Electricity Practice Principal Mark Dyson, the paper’s lead author, told Utility Dive. “This paper demonstrates that, because of technology and cost advances, portfolios of renewables, batteries, demand response and energy efficiency can replace fossil fuel assets.”
The paper has already attracted attention in clean energy circles.
“RMI’s modeling shows the portfolio can replace natural gas plants and save ratepayers money,” said Lon Huber, a vice president at Strategen Consulting, who helps states craft clean energy policy in regulatory proceedings.
The problem, RMI warns, is that developers engaged in a “rush to gas” have already planned $110 billion in gas plant investments by 2025. That trend could lock in $1 trillion in costs to the U.S. power sector by 2030 if it continues, analysts warn, and make it more difficult for renewables and batteries to get a foothold in the market.
The gas rush will likely continue, analysts say, if regulators and lawmakers do not provide new incentives and market rules to encourage battery storage and demand management, which will provide crucial flexibility in emerging clean energy portfolios.
Progress on that front is uneven, but some utilities are beginning to see the value in clean energy portfolios and are changing investment plans as a result.
The portfolio approach
More than half of the U.S. thermal generation capacity is over 30 years old and will reach retirement age by 2030, RMI reports. More efficient, lower-cost turbines and historic lows in natural gas prices have created the “rush to gas” to replace the retiring capacity.
EXECUTIVE SUMMARY – THE ECONOMICS OF CLEAN ENERGY PORTFOLIOS, ROCKY MOUNTAIN INSTITUTE
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.
50% of US thermal power plant capacity is likely to retire by 2030
$520 BILLION is required for natural gas-fired power plants to replace retiring capacity
$480 BILLION is required for fuel to run those power plants through 2030
“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.
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
RMI’s 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 gas-fired 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.
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 rate-based 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 technology neutral 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
To mitigate stranded asset risk and minimize ratepayer costs, investors and regulators should carefully reexamine planned gas 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 significantly 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. » $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 announced gas projects are proposed for 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-fired power plant construction before allowing recovery of costs through rates. Our study’s overall modeling approach relies on a conservative treatment of resource planning Our findings are dramatic, yet they are driven by a fundamentally conservative assessment of the relative cost-effectiveness of clean energy portfolios versus new natural gas-fired power plants. In particular, our single-asset planning framework severely limits the cost savings available, relative to leading-edge resource planning approaches.