by By Sarah McFarlane and Susanna Twidale
LONDON (Reuters) – Giant batteries that ensure a stable power supply by offsetting intermittent renewable supplies 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, which are used in Europe and 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 operators are already providing backup power to grids at a price competitive with gas power plants, meaning less gas will be used.
The change challenges assumptions about long-term demand for gas and may mean that natural gas plays a smaller role in the energy transition than most listed energy majors indicate.
In the first half of the year, 68 gas power plant projects were suspended or canceled worldwide, according to data provided exclusively to Reuters by the US-based non-profit Global Energy Monitor.
Recent cancellations include electricity plant developer Competitive Power Ventures’ announced decision in October to abandon a gas plant project in New Jersey in the United States. He cited low power prices and a lack of government subsidies without giving financial details.
British independent Carlton Power dropped 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, it launched plans this year to build one of the largest batteries to build the world’s largest. at the site.
“In the early 1990s, we were running gas plants baseload, now they are switching to probably 40% of the time and that will drop to 11%-15% in the next eight to 10 years,” Keith Clarke, chief executive. at Carlton Power, Reuters said.
Without providing price details, which companies say are commercially sensitive, Clarke said Carlton had struggled to finance the proposed gas plant in part because of uncertainty about the revenue it would generate and the number of hours it would run.
EYES UNDER SCRUDÁN
Developers can no longer use financial modeling that assumes gas power plants are used continuously throughout their 20-plus-year lifespan, analysts said.
Instead, modelers must predict how much gas generation is needed during peak demand and compensate for the hard-to-predict non-interval of renewable sources.
“It gets more complicated,” said Nigel Scott, head of structured trading and commodity finance at Sumitomo Mitsui Banking Corporation.
Investors are scrutinizing the modeling more, he said.
Banks are focused on financing plants with guaranteed income, said three bankers involved in energy project finance, asking 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, power producers offer to be backup suppliers.
The system has long been criticized by environmental campaigners on the grounds that it could amount to a fossil fuel subsidy. Its proponents say it is essential to ensure the smooth integration of renewable power and that the payments can also reward batteries.
Those selected to provide backup generation are paid to keep plants ready to come online at short notice to meet peak demand, or for outages at other plants, or to compensate for variations in wind or solar power generation.
These payments can improve the economics of gas-fired plants, but they are not enough to guarantee long-term profits.
Carlton Power has successfully secured a capacity auction contract for its proposed UK gas plant, but has had to withdraw due to delays in securing investment due to uncertainty over the project’s future revenues.
The UK first introduced a capacity market in 2014, and more than a dozen countries have followed similar schemes.
Battery operators and interconnectors are also participating in these auctions, and have started contracts.
The cost of lithium-ion batteries has more than halved from 2016 to 2022 to $151 per kilowatt of battery storage, according to BloombergNEF.
At the same time, renewable generation has reached record levels. Wind and solar power accounted for 22% of the EU’s electricity last year, nearly doubling its share from 2016, and surpassing the share of gas generation for the first time, according to European Electricity Review think tank Ember.
“In the early years, the capacity markets were dominated by fossil fuel power stations providing the flexible electricity supply,” said Simon Virley, head of energy at KPMG. Now that flexibility is being provided by batteries, interconnectors and consumers who are shifting their electricity use, Virley said.
TAKING RISKS
A 15-year government contract signed in 2020 to provide standby electricity services to the grid from 2023/24 supported energy company SSE’s start-up Keadby 2, SSE, a gas-fired power plant in the east of England, in March. The company had financed the plant before it had the standby contract, and it took four and a half years to build.
The economics of such a plant would look different now, said Helen Sanders, head of corporate affairs and sustainability at SSE Thermal.
“I don’t think we would be making an investment decision without income security through some kind of mechanism now because of the inherent risk of income security,” Sanders said.
“If you’re investing in something based entirely on exposure to the buying market, you’re going to see very high power prices, if you’re only running for a smaller number of hours.”
Efforts to reduce carbon emissions could impose another cost on fossil fuel plants: countries including the UK and the US are considering requiring plant operators to retrofit carbon capture infrastructure.
European Union rules introduced in January require gas stations seeking access to finance to build green buildings with carbon capture or be able to switch to low-carbon gases such as hydrogen from 2035.
OFF SWITCHES, EVs
As the energy transition accelerates, other developments may reduce the need for standby plants.
UK energy retailer Octopus Energy ran trials last year offering to pay households a small fee to stop using electricity for an hour at a time during periods of strong demand.
The trials covered the equivalent amount of power demand that a small gas plant would meet, or the amount that could be saved by switching off more than half of London for an hour.
Electric vehicles make a further difference as they can be charged when demand is weak and then power homes or send power back to the grid during periods of peak demand.
A typical EV sits parked 90% of the time with a battery capable of storing 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 will be able to displace about one-third of the region’s gas power capacity, according to Kaluza.
“There are a lot of things the grid can look at when it starts to look away from normal generation,” said Carlton’s Clarke.
($1 = 0.8025 pounds)
(Reporting By Sarah McFarlane and Susanna Twidale; Editing by Simon Webb and Barbara Lewis)
