New gas plants about to be priced out of electricity market

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The much hyped “dash-for-gas” may never occur, at least in Australia. Soaring gas prices, and plunging solar costs are pricing gas-fired generation out of the domestic electricity market, analysts say, and the role of gas will be restricted as a back-up to wind and solar – at least until competitive solar storage technologies emerge.

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If you blinked, you probably missed it. The so-called dash-for-gas, hailed by its promoters as the cleanest and most efficient transition from dirty to clean energy, may stall pretty much before it started: the fuel is being priced out of the market.

This is the growing conclusion from a range of market analysts, who suggest the anticipated doubling of gas prices caused by the new LNG export arket, the falling cost of renewable alternatives, and the lack of demand means the anticipated boom in gas-fired generation will not occur.

There is simply no new demand for base-load gas generators (called combined cycle of CCGT) and the carbon price is insufficient to cause a fuel switch from coal to gas, as has happened in the US. Even peaking gas plants are not required and may be priced out of the market by solar PV, or solar thermal with storage by the end of the decade.

Bloomberg New Energy Finance this week reiterated its conclusions that wind energy is already vastly cheaper than newly built gas-fired – and coal fired – generation in Australia, and large scale solar farms will achieve a similar status by 2015/16.  The surge in gas prices as LNG exports begin will widen that gap.

“Renewable energy is the cheapest source of new electricity generation,” BNEF analyst Kobad Bhavnagri told the Bloomberg news service this week. “It is quite conceivable that we could leapfrog straight from coal to renewables to reduce emissions as carbon prices rise …. the export of LNG from Australia could essentially price new gas-fired electricity generation out of the market.”

This is a point echoed by the global investment bank Citi, which says that large scale solar will be competitive with baseload gas by 2017 in Australia, and even earlier in countries with a higher gas price (LNG prices have soard to $20/MMBu in recent Asian trading.

In a recent report, Citi noted that solar PV is probably already cheaper than peaking gas fired plants, which are cheaper to build but more expensive to run. Their use has mostly been to cater for peaks in demand that the baseload generators cannot meet.

Citi says the price difference is already evident, so much so, that even in the US, where the shale gas boom and lack of exports has meant that gas prices have been low – less than $5/MMBu – utilities are choosing to build utility scale solar PV plants instead of peaking gas-fired generation.

The predictions underline a growing theory that the destiny of gas will not be to play a “transitional” role so much as a “supportive role” as the world moves to cleaner energy systems.

As we reported earlier this month, Citi also notes that while demand for gas may be squeezed by rising gas prices, the greater deployment of renewables will eventually require more gas fired generation to be built, as it is more flexible than coal (or nuclear), and can more readily fill in the gaps between wind and solar.

However, Citi also noted that that opportunity will only exist as long as renewables are unable to provide their own dispatchable energy, and that could occur within a decade if current predictions for the deployment of concentrated solar thermal with storage hold true.

Here’s reminder of what Citi said in its report last week, and a reprint of a telling graph:

citi solar lcoe

Citi says that by the end of the decade, solar would be unable to compete with CCGT if gas is at $3/mmbtu, but Citi says this price is unlikely as it does not reflect the costs of gas production – even in shale gas reserves.

“Moreover, if we are to look at the higher gas prices in other regions such as Europe and Asia (particularly Japan at around $16) solar can be highly competitive,” it writes.

“We would also note that this is versus a CCGT; were we to conduct the analysis for a super peaking plant which only operates at peak times (i.e. when solar generates) we believe that the economics of solar would be competitive in sunnier regions such the southern US now.

“Indeed many utilities are actually building solar plants instead of peakers, believing the economics to be better already (i.e. Georgia Power).”

It is interesting to note that in Australia there are a range of solar PV projects that developers believe can compete in the current market, albeit with the assistance of renewable energy certificates. Most of them, such as those proposed by Investec in Western Australia, Germany’s in Victoria, and contemplated by in Queensland, would require power purchase agreements from utilities.

These are essential for bank finance, but because of the uncertainty about the fate of the Renewable Energy Target should the Coalition win the election in September, PPA’s are not being written by most of the major utilities.

However, there is talk in the industry that AGL Energy may go ahead with a 10MW solar PV project in Williamsdale in the ACT – even if it failed to win pricing support in the next round of the ACT Solar Auction. The talk is that the economics already present well.

Another interesting graph is this “parity timeline” prepared by Citi, attempting to predict which countries will arrive at solar-baseload gas parity, and in what year.

 

Screen Shot 2013-04-11 at 10.38.34 AM

 

Citi says it is clear that solar becomes competitive vs CCGT’s in an increasing number of countries from 2015 onwards.

“Perhaps the last, but most important, point to make is to accentuate how disruptive solar is as a technology given these 30 per cent derived learning rates,” it writes. ” The key point is that solar will keep on getting cheaper, and conversely (assuming that lowest hanging fruit has been developed first, and barring black swan events like shale) fossil fuels are likely to get more expensive over time, making the relative economics ever more compelling.”

 

Giles Parkinson is founder and editor of RenewEconomy.com.au, and is also the founder of OneStepOffTheGrid.com.au and founder/editor of www.TheDriven.io. Giles has been a journalist for 35 years and is a former business and deputy editor of the Australian Financial Review.

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5 Comments
  1. adam 6 years ago

    I’m curious to know why the variation across countries between socket and utility scale parity – this would be very interesting.

    Also, my understnading of gas peakers is that while LCOE isn’t that cheap, they just dispatch at peak spot prices which has a good margin. Low $/MW CAPEX (comparitively) is justifiable.

    Dispatchable renewables wouldn’t offset gas peakers because they don’t have low CAPEX despite competitive LCOE.

    I don’t know better but I would say this stands even in the face of rising gas prices.

    As for CCGT, well according to this website, with NEM demand reduction we don’t need any new generation – coal, gas or renewables… The only reason people would install more is to avoid rising retail power prices.

  2. Gary Caganoff 6 years ago

    Anyone know what the deeper implications for CSG might be then? Stopping myself from thinking it may be ‘game over’ for them till I know more.

    • Giles Parkinson 6 years ago

      No real implications for CSG. That will be exploited as long as the landholders are not able to stop it, or while there is an international market for gas. It just means it won’t be used so much for domestic electricity, but that was never part of the main game.

  3. Ben Rose 6 years ago

    Giles your points about the decreasing LCOE of renewables are backed up by a recent report that I co-authored.

    While open cycle gas power stations will provide dispatchable backup for wind and PV initially, there are three renewable backup technologies you haven’t mentioned in the article that are already viable and could start to take over within a few years if governments had proactive policies and strategies:
    – Biomass gasification – gas turbine fired by biomass from plantation wood waste, straw and oil mallee plantations (these could provide up to 40% of WA’s electricity)
    – Dispersed small residential and commercial storage batteries linked to smart grids.
    -Pumped ocean storage hydropower utilizing salt water ponds of about 100-200 ha on cliffs/ high areas 120 – 130 m in elevation within 1 km of the coast. There are sites with potential north of Geraldton and east of Albany in WA and near Pt Augusta and and Fleurieu Peninsula in SA; there would be others in QLD; NSW and Vic have significant additional conventional pumped hydro storage potential

    I can provide articles on the biomass and pumped ocean storage if you wish.

    • adam 6 years ago

      Pumped ocean storage sounds interesting!

      Let’s see some numbers! Is the report public?

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