The folly of gas: Most new gas generators not viable, says Carbon Tracker

The folly of Australia hitching its future to a “gas-led recovery” has been further underlined by a new report from independent financial think tank Carbon Tracker that has found that nearly a third of US gas generators are loss-making – a trend which is only set to worsen as fuel prices surge.

Its new analysis of the 835 operational gas power plants in Europe with a total nameplate capacity of 189GW, and 2,200 plants in the United States with a nameplate capacity of 513GW, Carbon Tracker estimated that  that 43GW worth of European plants and 159GW of US plants are loss making.

Worse, it said most gas plants currently planned or under construction will never recover their investment – a fate that awaits, most Australian energy analysts agree, new gas projects in Australia such as Snowy Hydro’s government funded Kurri Kurri gas generator in the Hunter Valley.

Carbon Tracker said that more than $US24 billion is at risk in the United States and nearly $US3.5 billion in the UK is at risk, even if such new or planned gas plants run for their full planned lifetime.

But, gas plants are phased out in line with a target of net-zero by 2050, or in the case of both coutries, a zero carbon grid by 2035, nearly $US16 billion worth of investments in gas plant units that are currently profitable could end up stranded – including $US5.8 billion in the US and $SU10.1 billion in Europe.

Carbon Tracker’s new report, Put Gas on Standby, finds that gas is the largest single source of power sector emissions in Europe, accounting for 34%, and for 44% of US power sector emissions.

Moreover, in both Europe and the US it is already cheaper to generate energy by building new solar and onshore wind capacity than it is to continue running existing gas plants.

“The long-term use of unabated gas for power generation is incompatible with climate targets, and units are unlikely to run for their full lifetimes,” said Jonathan Sims, Carbon Tracker Senior Analyst and report co-author of the report.

“Investors who continue to back gas ahead of renewables are not only exposing themselves to the risk of stranded assets but are also potentially missing out on higher rates of return from the clean energy sector.”

The report further warns that the economics of gas power are growing increasingly fragile, with units regularly exposed to volatile gas prices which are already at record levels in Europe. In Europe, gas plant operators are also exposed to carbon prices which have risen 10-fold in four years.

Carbon Tracker also warns that its report may in fact understate the economic volatility and predicament for gas plant operators.

The report assumes 2021 gas prices averaging around $24/MWh in Europe and $11/MWh in the US – based on pre-COVID levels averaged from 2018-19. In reality, though, the average gas price since October 2020 has been nearly 50% higher in Europe at over $35/MWh and more than a third higher in the US at $15/MWh.

Utilities in the US are currently planning to build 89 new gas plants with a combined capacity of 28.1GW in areas of the country where they do not benefit from regulated prices. However, the Carbon Tracker report finds that none of these new plants will be viable, putting over $US24 billion at risk as a result.

In Europe, planned capacity has a capacity of 23.7GW but more than two thirds will never recoup the investments, putting nearly $US3.5 billion in the United Kingdom where plans for 20 units with a combined capacity of 11.4GW are at risk.

“Policy makers must consider whether supporting potentially unprofitable gas projects which may undermine efforts to achieve long-term climate targets is the best use for taxpayer funds,” said Sims.

“Renewables, backed by storage, are increasingly able to provide reliable grid services that are not affected by volatile fuel and carbon prices. This offers greater price stability for consumers and business.”

Australia’s “gas-led recovery” as proposed by the current Liberal party in power has already been dismissed as “a fraud” by many across Australia, even as the Federal Government tests the waters of a net-zero target.