Bridge to nowhere: does natural gas energy have a future? 

As the cost of renewable energy falls and global economies set their sights on achieving net-zero emissions targets, recent reports have found that up to $1tn of gas assets are at risk of being stranded. Heidi Vella finds out more. 

Emitting around half the CO2 of coal-fired power plants, natural gas energy generation is often considered a ‘bridge’ fuel or a ‘stepping stone’ to lowering overall greenhouse gas levels from electricity generation. In fact, the fall in CO2 emissions in the US between 2007 and 2017 is largely attributed to the increased burning of gas instead of coal.

Furthermore, the flexibility of gas ‘peaker plants’, which can be turned on when extra capacity is needed, has actively helped integrate more and more intermittent renewable energy onto the grid.

However, despite gas’ role in furthering decarbonisation in the energy sector, two recent studies have shown that costs and climate change targets may well mean that gas power plants are close to reaching the end of their usefulness.

A report by Rethink Energy, published in March 2020, goes as far as to say that the falling cost of renewable energy technologies and emission reduction targets could result in investments in natural gas power generation leading to losses of $1tn by 2050.

From as early as 2025, renewables-plus-storage projects in both wind and solar will undercut the levelised cost of energy of new gas-fired power plants, starting in Europe and Asia, before spreading to gas-producing nations, it notes.

Another report, ‘Natural Gas: A Bridge to Climate Breakdown’, by US-based non-profit shareholder advocacy group As You Sow, states that there needs to be a clear end for natural gas or continued investment will contribute to distinct climate risks that threaten shareholder value.

Playing catch-up in the US

“In Europe, offshore wind has been there for a number of years, but I think in the United States we're a little bit behind that,” said Karustis.

Should it be successful, Halo’s approach could lead to a surge in US onshore wind, which has historically lagged behind other regions in terms of wind installation and production. Since 2016, according to the International Energy Agency, the US has installed just 22.6GW of new onshore wind capacity, compared to 30.7GW in the EU, and 50.3GW in China, struggles that Karustis hopes to address.

Last December, the Chinese Government approved a number of new offshore wind projects, totalling 13GW of production and costing around $13.3bn, as the country continues to invest in utility-scale power. Karustis hopes projects like Halo’s distributed turbine can contribute to a more balanced wind sector in the US, with both large- and small-scale operations expanding renewable power.

“The large-scale wind turbines wouldn't be phased out, it's kind of an ‘all of the above’ thing,” he said. “The large wind farms play a very important role for us in reducing the carbon footprint globally, and hopefully the micro wind market is going to augment that by producing energy where energy is being used. It's a good two-pronged approach.”

This two-pronged approach also includes other renewable power sources, including solar and utility-scale wind; Halo is not trying to replace all clean energy with its turbines, but offer another option for people eager to engage in renewable power, who may have been historically sidelined due to the high costs of building utility-scale facilities or the unsuitable geographical characteristics of the places they live.

“When you look at that market we're very excited because just as megawatt-scale wind is a large market, I think distributed wind can be as big of a market or bigger over time,” said Karustis.

“When you have incentives and improvements in the technology, the costs go down, so you can be more competitive and compete, and that's certainly the case with megawatt-scale wind,” he continued. “Just 15/20 years ago, it wasn't competitive with natural gas [and] coal, but it is now. So those government policies have helped and they've driven the technology improvements, so it's all bundled together.”

Beginning of the end for natural gas?

The As You Sow report argues that, although natural gas was a renewable enabler at first, investment in infrastructure for the energy source, particularly in the US, is incompatible with decarbonisation goals set at the Paris Climate Accord in 2015.

“Billions of dollars are poised for investment to build natural gas infrastructure throughout the United States. This investment drive, which includes power plants and pipelines with multi-decadal lifespans, is incompatible with maintaining a safe climate and often directly at odds with a company’s own net-zero emissions ambitions,” says Lila Holzman, energy programme manager at As You Sow.

According to a 2019 report from Bloomberg, the top 10 energy companies are planning investments in gas approaching $1tn by 2030. It notes that if governments "make good on tough targets for cutting greenhouse gas emissions” much of that infrastructure could become abandoned.

/ Billions of dollars are poised for investment to build natural gas infrastructure throughout the United States. /

A 2018 report by the Intergovernmental Panel on Climate Change, which declared the world had a mere 12 years to halve its emissions or fail to meet the 1.5° global warming target, has added a sense of urgency to the task at hand.

It prompted many, including heavy greenhouse gas emitters and entire countries, to set ambitious, long-term decarbonisation targets. Xcel Energy, PSEG, Duke Energy, Dominion Energy, DTE, Arizona Public Service, and NRG have all set noteworthy net-zero by 2050 emissions goals.

However, Holzman says there are certain policies in place that incentivise utilities to keep business as usual and to continue building big gas infrastructure.

“They can still get good returns on these projects by passing the cost onto the customer,” she explains. “We want to see more information from the companies as to why they think the levels of natural gas build-up they have planned is necessary,” she adds.

Cost factor: how soon will renewables become cheaper than gas?

The case for renewables with storage is becoming more compelling economically. Harry Morgan, lead analyst at Rethink Technology Research, says 2025 is the first year the firm expects renewables to undercut natural gas, initially in China.

“By 2030, it will be cheaper to install and run a new renewables and storage portfolio than it will existing gas turbines. The lifespan of this technology is 20-30 years, which takes you through to 2050 when Europe, in particular, is expected to be carbon neutral,” he says.

“Having gas on the books is against that and, even if you ignore the environmental side, the economic argument alone should dispel the fact that natural gas can be used as a bridge fuel,” he adds.

/ By 2030, it will be cheaper to install and run a new renewables and storage portfolio than it will existing gas turbines. /

Data from Lazard, as highlighted in the As You Sow report, shows that unsubsidised solar plus battery storage is already, in some cases, cheaper than natural gas. For example, NV Energy, which in 2019 procured 1,200MW of solar at $20 per MWh and 580MW of four-hour battery storage for $13 per MWh. By comparison, the low-end average cost of gas estimated by Lazard from a natural gas-fired combined-cycle plant is $44 per MWh.

The ongoing Covid-19 pandemic, which has seen gas prices plummet, could potentially impact the levelling up of costs in the short term however.

Is divesting in gas realistic?  

Daniel Grosvenor, advisory corporate finance partner at Deloitte, says there is a geographical split around the world regarding how natural gas is viewed and invested in.

“Western Europe, including the UK, is very pro-renewables and pushing towards net-zero decarbonising very quickly, whereas in the US decarbonisation at present is replacing coal plants with gas plants, though different states have different policies. Similarly, Asian economies, although they are building renewables, they are also building gas and coal quite significantly.”

/ Fossil fuels, including gas, still provide 85% of the world’s energy needs. /

The International Energy Agency’s 2019 World Energy Report noted that, since 2010, 80% of growth in gas use has been concentrated in three key regions: the United States, where the shale gas revolution was in full swing; China, where economic expansion and air quality concerns have underpinned rapid growth; and the Middle East, where gas is a gateway to economic diversification from oil.

Despite the falling cost and the urgency of decarbonising the energy ecosystem, fossil fuels, including gas, still provide 85% of the world’s energy needs. How will this be changed in such a relatively short frame?

Setting policy for gas assets

In large part, policy will determine the path for gas assets going forward. A carbon tax could accelerate the depreciation of their value, but the major players, Europe included, have been very slow in devising a meaningful system. In the US, Holzman says, it’s “not worth holding your breath for.”

“I think a carbon tax would absolutely help accelerate and get us moving faster in the right direction,” she says. “We need policy to incentivise utilities, so far it has only emphasised the need to be risk averse because they provide an essential service.

“I think the directionality of the energy transition is set, the question is how quickly and what's the scale and scope of that transition? I do think the US presidential candidate has an important role to play in that.”

In Europe however, Morgan anticipates the carbon tax will likely increase in the near future as the economic bloc looks to meet its net-zero ambitions.

/ We need policy to incentivise utilities, so far it has only emphasised the need to be risk averse because they provide an essential service. /

A group of countries to take a different path to the Netherlands are those in West Africa, although its policies are far more supportive of renewables, albeit through a different route.

Those belonging to the Economic Community of West African States (ECOWAS), including Nigeria, the Ivory Coast, and Mali, are set to reap long-term benefits from investment in solar power, according to a 2020 research paper published by academics at the Lappeenranta-Lahti University of Technology in Finland.

The report argues that a combination of de-incentivising investment in traditional power sources and free market energy reforms could see the entirety of ECOWAS’s energy needs met by solar power.

Critically, the paper suggests that ECOWAS’s energy needs can be met, and its power sector reformed, without the need for direct government subsidies. It may be possible to cut out the middleman used in the Dutch model to overcome the prohibitive cost of renewable installation and move directly to a system where economic incentive and environmental protection are satisfied at once.

While this is an optimistic approach, this is perhaps the ideal state to which the world’s major energy producers ought to aspire, where energy and financial needs can be met without direct government subsidies.

Gas in the near-term

Going forward, Holzman says she would like to see more transparency around the investment modelling methods of large utilities in the US.

“I think one other piece of the puzzle is how utilities model to determine their future need to meet demand. We need to make sure their models are not biased for gas and they look at the benefits of renewables and storage,” she explains.

“I think investors will increasingly question this, especially as we see some instances of gas plants retiring early or being rejected. I feel like the more examples of this there are, the more investors will pay attention,” she adds.

/ We're seeing quite a few players starting to offload their gas assets and this will continue over the next five years. /

In terms of the future direction of the finances, Morgan says Rethink has been conservative with their assumptions.

“We're seeing quite a few players starting to offload their gas assets and this will continue over the next five years; Xcel Energy, for example, is selling off theirs as quietly as possible. They’ll be offloading them to other utilities that think they can run them at a lower cost,” he says.

“There needs to be more transparency around these natural gas projects, however, especially if they're going to last their lifetime; they will likely have to be propped up by taxpayer finances and I think that’s what we could see happen more and more.”