Written by: Sarah McFarlane and Susanna Twidale
LONDON (Reuters) – Giant batteries that provide stable power supplies by offsetting intermittent renewables are becoming cheap enough that developers are abandoning scores of projects for gas-fired generation around the world.
The long-term economics of gas-fired plants used primarily to compensate for the intermittent nature of wind and solar power in Europe and parts of the United States are changing rapidly, according to Reuters interviews with more than a dozen power plants. developers, project finance bankers, analysts and consultants.
They said some battery operators already provide backup power to grids at a price competitive with gas plants, meaning gas will be used less.
This shift challenges assumptions about long-term gas demand and could mean natural gas has a smaller role in the energy transition than the largest listed energy companies suggest.
68 gas power plant projects were put on hold or canceled worldwide in the first half of the year, according to data provided exclusively to Reuters by the US-based non-profit Global Energy Monitor.
Recent cancellations include power plant developer Competition Power Ventures’ decision in October to abandon a gas plant project in New Jersey, US. He cited low energy prices and the absence of government subsidies, without providing financial details.
British independent Carlton Power abandoned plans for an 800 million pound ($997 million) gas power plant in Manchester, northern England, in 2016. Reflecting the shift in economics in favor of storage, this year it launched plans to build one of the world’s largest batteries. on the ground.
“In the early 1990s we were operating gas plants at base load, now that is probably changing to 40% and that will fall to 11-15% over the next eight to 10 years,” CEO Keith Clarke said. Carlton Power also told Reuters.
Carlton is struggling to finance the planned gas plant, in part because of uncertainty about the revenues it will generate and how many hours it will operate, Clarke said, without giving price details, which the companies said were commercially sensitive.
MODELS UNDER REVIEW
Developers can no longer use financial modeling that assumes gas plants are used continuously throughout their 20-plus-year lives, analysts said.
Instead, modelers need to predict how much gas production will be needed during times of peak demand and compensate for outages from renewable sources that are difficult to predict.
“It’s getting more complex,” said Nigel Scott, head of structured trade and commodity finance at Sumitomo Mitsui Banking Corporation.
He added that investors are putting more scrutiny on modeling.
Three bankers involved in the financing of energy projects said that banks are focused on financing facilities that provide guaranteed income and asked not to be named because they are not authorized to speak to the press.
Many countries around the world, especially in Europe, provide payments for spare power plants through capacity markets. In these markets, energy producers offer to become backup suppliers.
The system has long been criticized by environmental advocates on the grounds that it could amount to a subsidy for fossil fuels. Advocates say it is necessary to ensure the seamless integration of renewable energy and that the payments can also reward batteries.
Those selected to provide backup generation are paid to ensure that facilities are ready to come online at short notice to meet peak demand, to cover outages at other facilities, or to compensate for differences in wind or solar power production.
These payments may improve the economics of gas-fired plants, but they are not enough to guarantee long-term profits.
Carlton Power signed a capacity auction contract for the planned gas plant in the UK, but was forced to abandon this contract due to delays in securing investment due to uncertainty about the project’s future revenues.
The United Kingdom first introduced a capacity market in 2014, and more than a dozen countries have followed similar programs.
Battery and interconnection operators are also participating in these tenders and they are starting to win tenders.
The cost of lithium-ion batteries has fallen by more than half from 2016 to 2022, falling to $151 per kilowatt-hour of battery storage, according to BloombergNEF.
At the same time, renewable energy production reached record levels. According to think tank Ember’s European Electricity Review, wind and solar energy accounted for 22% of the EU’s electricity last year; Their share almost doubled compared to 2016 and exceeded the share of gas production for the first time.
“In the early years, capacity markets were dominated by fossil fuel power plants providing flexible electricity supply,” said KPMG Energy Director Simon Virley. Virley added that batteries, interconnects and consumers now changing their electricity usage also provide this flexibility.
INCREASED RISKS
The March start-up of UK energy company SSE’s Keadby 2, a gas plant in eastern England, was supported by a 15-year government contract signed in 2020 to provide backup electricity services to the grid from 2023/24. The facility was financed by the company before the replacement contract was awarded and took four and a half years to build.
Helen Sanders, head of corporate affairs and sustainability at SSE Thermal, said the economics of such a facility would now look different.
“Because of the inherent risk associated with income security, I don’t think we would make an investment decision without income security through some kind of mechanism,” Sanders said.
“If you’re investing in something that’s purely based on the risks in the commercial market, just running a smaller number of hours, you’re going to have to see really, really high energy prices.”
Efforts to reduce carbon emissions could impose another cost on fossil fuel plants: Countries including the United Kingdom and the United States are considering requiring operators to retrofit facilities with carbon capture infrastructure.
European Union rules introduced in January require gas plants that want to access green finance to be built with carbon capture or switch to the use of low-carbon gases such as hydrogen from 2035.
OFF SWITCHES, HOUSES
As the energy transition accelerates, other developments may reduce the need for backup facilities.
UK energy retailer Octopus Energy last year ran trials of offering to pay households a small fee to stop using electricity for an hour during periods of peak demand.
The trials involved energy equivalent to the energy demand a small gas power plant could meet, or the amount that could be saved by shutting down more than half of London for an hour.
Electric vehicles are another disruptor, as they can be charged during times of weak demand and can power homes or send electricity back to the grid during periods of peak demand.
A typical electric vehicle sits parked 90% of the time, with a battery that can store enough energy to power the average modern home for two days, energy software platform Kaluza said in a report published in December.
According to Kaluza, there are expected to be 40 million electric vehicles in Europe by 2030, which could replace about a third of the region’s gas energy capacity.
“There’s a lot of things the network can look at as it starts to move away from traditional generation,” Carlton’s Clarke said.
($1 = 0.8025 pounds)
(Reporting by Sarah McFarlane and Susanna Twidale; Editing by Simon Webb and Barbara Lewis)