By Sarah McFarlane and Susanna Twidale
LONDON (Reuters) – Giant batteries that provide a stable power supply by offsetting intermittent renewable energy supplies are becoming cheap enough to prompt developers worldwide to abandon dozens of gas-fired generation projects.
The long-term economics of gas-fired plants, used in Europe and some parts of the United States mainly to offset the intermittent nature of wind and solar power, 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 companies are already supplying backup power to the networks at a price competitive with gas-fired power stations, meaning less gas will be used.
This shift challenges assumptions about long-term gas demand and could mean that natural gas plays a smaller role in the energy transition than posited by the largest listed energy giants.
In the first half of the year, 68 gas-fired power plant projects were suspended or canceled worldwide, according to data provided exclusively to Reuters by US-based nonprofit Global Energy Monitor.
Recent cancellations include the decision announced in October by power plant developer Competitive Power Ventures to abandon a gas plant project in New Jersey in the United States. It cited low energy prices and the absence of government subsidies without providing financial details.
British independent Carlton Power dropped plans in 2016 for an 800 million pound ($997 million) gas-fired power plant in Manchester, northern England. Reflecting the shift in economics in favor of storage, it this year launched plans to build one of the world’s largest batteries. On the website.
“We were running on baseload gas power stations in the early 1990s, now they are moving to probably 40% of the time and that will drop to 11%-15% over the next eight to 10 years,” said Keith Clarke, CEO at Carlton Power, told Reuters.
Without giving pricing details, which companies say are commercially sensitive, Clarke said Carlton had struggled to part-finance the planned gas plant due to uncertainty over the revenue it would generate and the number of hours the plant would operate.
MODELS UNDER INVESTIGATIONS
Developers can no longer use financial models that assume gas-fired power plants are in continuous use over their 20-plus year lifespan, analysts say.
Instead, modelers must predict how much gas generation is needed during times of peak demand and compensate for the variability of renewable sources that are difficult to predict.
“It’s getting more complex,” said Nigel Scott, head of structured trading and commodity finance at Sumitomo Mitsui Banking Corporation.
Investors are increasingly paying attention to the models, he added.
Banks are focused on financing factories that have guaranteed revenues, said three bankers involved in financing energy projects. They asked not to be named because they were not authorized to speak to the press.
Many countries around the world, but especially in Europe, provide payments for standby power plants through capacity markets. In these markets, energy producers offer the opportunity to be backup suppliers.
The system has long been criticized by environmentalists as it could amount to a subsidy for fossil fuels. Its proponents say it is necessary to ensure the smooth integration of renewable energy and that the payments could also reward batteries.
Those selected to provide backup generation are paid to keep plants ready to come on line at short notice to meet peak demand, or to cover outages at other plants, or to accommodate variations in generation to compensate for wind or solar energy.
These payments can improve the economics of gas plants, but are insufficient to guarantee long-term profits.
Carlton Power has won a capacity auction contract for its planned UK gas plant, but was forced to walk away due to delays in securing investment due to uncertainty over the project’s future revenues.
Britain first introduced a capacity market in 2014, and more than a dozen countries followed with similar arrangements.
Battery and interconnector operators are also participating in these auctions and starting to win contracts.
According to BloombergNEF, the cost of lithium-ion batteries has more than halved between 2016 and 2022, to $151 per kilowatt-hour of battery storage.
At the same time, renewable energy generation has reached record levels. Wind and solar power provided 22% of the EU’s electricity last year, almost doubling their share from 2016 and surpassing the share of gas generation for the first time, according to think tank Ember’s European Electricity Review.
“In the early years, capacity markets were dominated by fossil fuel power stations that provided a flexible electricity supply,” said Simon Virley, head of energy at KPMG. Now batteries, interconnectors and consumers shifting their electricity use also offer that flexibility, Virley added.
RISING RISKS
The start-up in March of Keadby 2, a gas-fired power station owned by British energy company SSE in eastern England, was supported by a 15-year government contract signed in 2020 to provide standby electricity services to the grid between 2023 and 2024. The factory was financed by the company before it had a standby contract, and took four and a half years to build.
The economics for such a plant would be different now, says Helen Sanders, head of corporate affairs and sustainability at SSE Thermal.
“I don’t think we would make an investment decision now without certainty of income through some mechanism, because of the inherent risk that comes with certainty of income,” Sanders said.
“If you invest in something purely based on trading market exposure, you should see really, really high energy prices, as long as you run lower hours.”
Efforts to cut CO2 emissions could mean even more costs for fossil fuel plants: countries including Britain and the United States are considering requiring operators to retrofit their plants with capture infrastructure of carbon.
European Union rules introduced in January require gas plants that want to access green financing to be built with carbon capture or be able to switch to using low-carbon gases such as hydrogen from 2035.
SWITCHES, EVs
As the energy transition gathers pace, other developments could reduce the need for backup power plants.
British energy retailer Octopus Energy last year ran trials offering to pay households a small fee if they stopped using electricity for an hour at a time during a period of high demand.
The tests focused on how much energy a small gas-fired power station could cover, or what could be saved by switching off more than half of London for an hour.
Electric vehicles are a further disruptor because they can be charged when demand is weak and then power homes or send power back to the grid during peak periods.
A typical electric car is 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.
In Europe, 40 million electric vehicles are expected by 2030, which could replace about a third of the region’s gas energy capacity, according to Kaluza.
“There are a lot of things the grid can look at as it starts to move away from conventional generation,” Carlton’s Clarke said.
($1 = 0.8025 pounds)
(Reporting by Sarah McFarlane and Susanna Twidale; Editing by Simon Webb and Barbara Lewis)