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Beaten by solar on price: Why natural gas is next fossil fuel to go

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CleanTechnica

Secrecy about the price that California utilities pay for natural gas contracts is a new sign that PV has now passed market price parity at wholesale (as well as at retail: for rooftop customers).

Image Credit: Ilias Bartolini via Flickr

Image Credit: Ilias Bartolini via Flickr

The utility-scale solar industry used to have to compete against a “Market Price Referent” (MPR: the cost of an average natural gas contract). The idea was that, if a solar PPA could be priced at the same or less than a typical natural gas PPA, then it was considered competitive. Utilities in California are required by regulators to choose the cheapest option in contracting for electricity.

The MPR back then, in California, was 9 cents a kWh. Beating that price with 2009-era solar was a struggle, but prices dropped so fast as more solar was deployed that, if the MPR were still being used, it would appear that solar would simply beat gas on price.

Now that solar PPAs are being signed at less than half that old MPR, all of a sudden it is quite difficult to find any MPR or any gas PPAs to compare prices. MPR figures are no longer used in comparing solar to natural gas.

Solar at 3 Cents per kWh Beats Gas

In the US, First Solar, SunPower, and several other key utility-scale players have been building utility-scale solar in the US3 cent range since 2015. Even smaller municipal utilities have been able to procure solar at 3 cents a kilowatt-hour (for example, the city utilities of Austin and Palo Alto).

To be fair, comparing solar PPAs to natural gas PPAs is comparing apples to oranges.

When a utility signs a Power Purchase Agreement (PPA) for a renewable source like solar that has no fuel cost, the utility simply pays a pre-agreed rate per kilowatt-hour for the next 25 years.

The way that gas contracts are paid is completely different.

Mike Jacobs, who leads regulatory reform of electricity markets as senior energy analyst at the Union of Concerned Scientists, had a good analogy. He likened payment of a natural gas contract to the way you rent a car, where you pay one daily rate to have the car available to you, but on top of that, you also buy gas to run the car every day.

“The same way as cars are rented, in fossil fuel contracts, there is the set daily rate for the machine, and on top of that there is an unknown variable: the price of natural gas over the 20 year contract,” Jacobs told CleanTechnica. “Because of the unpredictable aspect of natural gas prices, that fuel cost is usually reimbursed after the fact by ratepayers.”

This after-the-fact reimbursement by ratepayers of the final actually-paid natural gas prices is a very murky area of natural gas contracts. Essentially, the utilities ask regulators for reimbursement by ratepayers, but as a part of a bundle that is part of a much larger reimbursement package. Insiders say that it is not easy to discern what actual price was paid for natural gas.

As a result, it is easy to obfuscate the total cost ratepayers pay for natural gas–fired electricity.

Nancy LaPlaca, principal of energy consultancy LaPlaca & Associates, told CleanTechnica: “If we don’t have someone really looking at this stuff, it’s very easy for the utility to hide a lot of costs and to stick it in rate base, because rate bases are extremely complex. Frankly, I don’t think anybody really even knows what’s in there.”

After many inquiries of the three utilities and the California Public Utility Commission, I discovered that the “machine” cost is also not public. At first, I was told that there is a three-year privacy protection, but even older gas contracts turned out not to be publicly available, unlike solar PPAs which frequently are public the week they are signed.

With natural gas, the “machine” price might now actually be higher overall than solar; but on top of that, there is no certainty that the daily varying price of each gas BTU will stay at today’s rock-bottom price. Natural gas fuel currently goes for under $3 per BTU. This results in per-kWh rates — for fuel — of under 3 cents — not including the fixed cost.

But the combined (fixed and variable) price of gas can be inferred by the reaction of utilities to the new solar prices.

“Utilities figure that just for the next hour, natural gas is two to three cents, and that’s just for fuel only: that’s with no payment for the machine,” Jacobs said.

“So when you walk in the door and say 3 cents/kWh for your PV — and that is the guaranteed rate for 20 years! To a utility, you don’t understand how big a deal that is.”

Image Credit: EIA

Image Credit: EIA

Another consideration for utilities, as they compare solar or gas contracts, is the newly revealed risk of gas leaks from pipelines or underground storage.

Gas Leaks a PR Nightmare

Gas-fired electricity has two economic risks: the unknown future fuel cost compared to one-price solar, and the risks when storing large volumes of natural gas underground near population centers.

Aliso Canyon woke the general public to a nightmare scenario. Because natural gas–fired power plants are near cities, the fuel is stored in close proximity to large population centers. Natural gas must be contained in gigantic caverns under the ground.

When Aliso Canyon blew a leak in 2015, which peaked at more than 60,000 kilograms per hour, more than 8,000 residents had to be relocated for their immediate safety at SoCalGas’ expense. Residents have sued. The relocation cost is now estimated to top $665 million.

Barium sulfate and other metals — used in well drilling and forced down wells to stop leaks — have contaminated curtains, sofas, bedding, and carpets in the homes in the area. So there will be more cleanup costs in addition to the relocation costs.

Storing large volumes of natural gas underground close to population centers is unavoidable if you choose to burn gas to make electricity.

When the population of Southern California was much lower, natural gas was stored in large holding tanks. But by the early 1940s, SoCalGas had to switch to underground storage.

SoCalGas now has four large underground caverns created by what is left behind after an oil field has being hollowed out by oil extraction. Natural gas is stored underground in 326 depleted oil fields nationwide, as well as in 31 salt caverns and 43 aquifers.

Surprisingly, the EIA brought attention to the dependency on this weak link in natural gas infrastructure with a rare warning: Natural gas leak at California storage site raises environmental and reliability concerns.

“Energy companies, system operators, and government officials are also interested in the leak’s potential reliability implications during the upcoming periods of high natural gas demand (this summer, next winter), and in identifying possible actions to mitigate any reliability concerns. It is not yet clear how much storage capacity will be available at the Aliso Canyon facility, and in what timeframe, once the leak is stopped.”

So, Aliso Canyon woke the EIA to a new weakness in the infrastructure needed to support natural gas–fired electricity; economic risk.

Inside Climate News noted that there is a high risk of future Aliso Canyon disasters due to the wear and tear on this aging oil-field infrastructure. Just this week, PG&E has shut down another underground storage site that has sprung a leak, albeit not on the same scale.

This double economic risk may even be starting to give California utilities pause.

In describing a future energy supply of renewables with storage, the chief development officer at SDG&E, James Avery, told the Energy Storage North America conference in San Diego:

“I see a future where there will be no more gas turbines.”

Source: CleanTechnica. Reproduced with permission.  

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  • Don McMillan

    I am endeavouring to decipher the issue discussed in this article. As I see it solar and natural gas generation is used to supply the Californian electricity market. No mention of coal power stations. Electricity providers must meet demand. Solar on its own cannot meet demand. Gas must be the base-load provider and also the swing producer. So when Solar kicks in, it backs out the natural gas which is why Solar prices are linked to gas contract. This may also explain why gas storage is required.

    The main goal of gas contracts is to guarantee delivery. This I see is the problem. When the sun is shining the electricity spot price will decrease but also may oversupply the market. The Solar guys are arguing that they should be able to displace as much as they can supply especially due to the fact they can under-cut the gas price. The only way I can see to accommodate this request is to have no gas contracts and buy the gas when required on the spot market. This will create true competition when the sunshine’s but a monopoly at other times. History has shown that market arbitrage speculators manipulate this type of market. Remember Enron literally blackmailing California.

    I am sure the response to this explanation is “battery storage”. It’s ironic that the Natural Gas industry are buzzing with excitement at the prospects of a battery world. The volume of batteries required to replace power stations scares the environmental pants off me. Any case many places are experimenting with this concept and time will tell how successful and environmentally sound this technology is.

    • neroden

      Lithium-ion batteries are 100% environmentally sound. Zinc batteries are OK, though there is an unfortunate problem with lead and zinc tending to show up in the same ores.

      Lithium-ion batteries are cleaner than concrete, asphalt, or steel.

      (Let’s get rid of lead-acid, OK? Lead is really bad stuff.)

      • Don McMillan

        Nothing is 100% environmentally sound. Mining Lithium for example impacts the water table. Mining rare metals has lots of challenges. The big impact comes with the disposal of the batteries. Think of the volume. The cost required to recycle is not included in the purchase price. The energy required to recycle is problematic to green house emissions. With no full life plan for batteries it is inevitable they’ll end up in landfill. Then the next problem….

        • stalga

          ‘The cost required to recycling’ speaks of the external costs of the product. The externalities of fossil fuels are orders of magnitude greater than wind and solar. Not many people would take your argument seriously.

          The use of rare metals is very low throughout the industry, standard solar panels use no rare metals, to use one example. Batteries have always had a high recycling rate because everyone knows that even a dead battery is worth money.