Giant batteries drain the economics of gas power plants

Gigantic batteries, ensuring a steady power supply by counterbalancing the intermittent nature of renewable sources, are becoming affordable enough to prompt developers to abandon numerous gas-fired projects worldwide. According to Reuters’ discussions with numerous power plant developers, project finance experts, analysts, and consultants, the long-term economics of gas-fired plants – historically used to compensate for the variability of wind and solar energy – are swiftly changing. Some battery operators are already providing backup power to grids at prices that compete with gas power plants, indicating a diminishing role for gas in the energy landscape.

This shift challenges assumptions about future gas demand and could result in a reduced role for natural gas in the ongoing energy transition, contrary to the predictions of major energy corporations.

In the first six months of the year, data from the U.S.-based non-profit Global Energy Monitor, exclusively provided to Reuters, showed that 68 gas power plant projects were either suspended or canceled worldwide. Notable recent cancellations include Competitive Power Ventures’ decision in October to scrap a gas plant project in New Jersey, citing low power prices and lack of government subsidies without specifying financial details.

Carlton Power, an independent British company, abandoned plans for an almost billion-dollar gas power plant in Manchester back in 2016. Reflecting the shifting economic landscape favoring storage solutions, the company is now aiming to construct one of the world’s largest batteries at the same site. Keith Clarke, Carlton Power’s CEO, highlighted the transformation in gas plant usage over the years, indicating a significant drop from running them as baseload in the past to potentially operating only 11% to 15% of the time in the next decade.

While refraining from sharing specific pricing information due to commercial sensitivity, Clarke mentioned Carlton Power’s struggles in securing financing for the proposed gas plant, largely due to uncertainties regarding revenue generation and operational hours.

MODELS UNDER SCRUTINY

Analysts noted that developers can no longer rely on financial models assuming constant utilization of gas power plants across their lengthy operational lifespan, which often spans over 20 years.

The revised approach demands predictive models that gauge the necessary gas generation during peak demand periods and accommodate the unpredictable nature of renewable sources.

“It’s definitely getting more intricate,” remarked Nigel Scott, head of structured trade and commodity finance at Sumitomo Mitsui Banking Corporation.

Investors are closely scrutinizing these models, emphasizing the need for increased accuracy and reliability, as per three bankers deeply involved in energy project finance.

Financial institutions are particularly interested in funding plants that offer guaranteed revenues, although these bankers preferred anonymity due to lack of authorization to speak to the press.

Numerous countries, especially in Europe, utilize capacity markets to remunerate standby power plants. These markets involve power producers bidding to serve as backup suppliers.

While criticized by environmental advocates for potentially subsidizing fossil fuels, proponents argue that these markets are crucial for integrating renewable power and can also benefit batteries.

Selected providers of backup generation are compensated to keep plants ready to swiftly come online during peak demand, cover other plants’ outages, or balance the variability of wind or solar power.

These payments can enhance the financial viability of gas-fired plants but aren’t adequate to ensure sustained profitability.

For instance, Carlton Power secured a capacity auction contract for a planned UK gas plant but had to relinquish it due to investment delays stemming from uncertainties around future revenues.

Introduced in 2014 in the UK, capacity markets have been adopted by over a dozen other countries. Battery and interconnector operators are increasingly participating in these auctions and securing contracts.

The cost of lithium-ion batteries has significantly decreased from 2016 to 2022, dropping to $151 per kilowatt-hour of battery storage, according to BloombergNEF.

Simultaneously, renewable generation has surged, with wind and solar accounting for 22% of the EU’s electricity last year, surpassing gas generation for the first time, as indicated by Ember’s European Electricity Review.

Simon Virley, head of energy at KPMG, highlighted the shift in capacity markets, noting that while fossil fuel power stations initially dominated, now flexibility is provided by batteries, interconnectors, and consumers adjusting their electricity consumption patterns.

Also Read About –

‘Breakthrough battery’ from Sweden may cut dependency on China

RISING RISKS

The startup of SSE’s Keadby 2 gas power plant in eastern England, backed by a 15-year government contract from 2020 to provide standby electricity services starting 2023/24, was a substantial support. The plant, constructed over four-and-a-half years, was financed by the company even before securing the standby contract.

Helen Sanders, SSE Thermal’s head of corporate affairs and sustainability, highlighted the changed landscape for such investments today. “We wouldn’t likely make an investment decision without revenue security through some mechanism now, given the risk associated with revenue stability,” she mentioned. The dynamics for such plants have evolved, necessitating security against market volatility.

Efforts to curb carbon emissions might impose additional costs on fossil-fuel plants. Some countries, including the UK and the US, are considering mandatory retrofitting of plants with carbon capture infrastructure.

New advancements in the energy transition could diminish the necessity for backup plants. Octopus Energy in the UK experimented with incentivizing households to abstain from using electricity for short periods during high-demand times, an approach that could match the power output of a small gas plant or even surpass the savings of turning off more than half of London’s power for an hour.

Electric vehicles are emerging as significant disruptors, capable of charging during low-demand periods and either powering homes or feeding power back into the grid during peak demand times. With the potential to store enough energy to power a modern home for two days, a typical EV sits idle around 90% of the time, according to a report by energy software platform Kaluza.

Europe anticipates around 40 million electric vehicles by 2030, potentially displacing nearly a third of the region’s gas power capacity, according to Kaluza. Carlton’s Clarke emphasized that the grid has multiple avenues to explore beyond conventional generation as these new technologies and strategies gain traction.

Source – https://www.reuters.com/