New gas plants about to be priced out of electricity market

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 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.

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.”