A decade ago, the International Energy Agency proclaimed a “golden age” for gas, arguing that enormous supplies and low prices would lead to an inexorable increase in demand for the foreseeable future.
Ten years later, the future of gas looks at best rocky. Volatility and high prices are back, and renewable energy is undercutting gas in most electricity markets. A new report says that the future role for natural gas is and should be limited, as gas-fired power plants are rapidly losing their competitive edge. Strikingly, the report says that any new natural gas plant proposed today will be unable to recover its initial investment, and thus, should be cancelled.
Gas to be “put on hold”
Any new natural gas plant proposed today will be unable to recover its initial investment.
Roughly 22 percent of European around 31 percent of U.S. natural gas power generation is already unprofitable, according to a new report from Carbon Tracker. The findings are remarkable given the massive buildout of natural gas plants, pipelines, and LNG export and import terminals over the past few years, aimed at taking advantage of what appeared to be abundant and cheap supplies of gas that was supposed to last for decades.
But renewable energy is already the cheapest form of power generation in many parts of the world. That dynamic will only continue as costs continue to decline.
“Virtually the entirety of the gas plant capacity included in our model is more expensive to operate than either new onshore wind or solar, meaning investors involved in each country we have assessed already have a cheaper and lower risk low carbon alternative to continued gas investment available to them, while we project that renewables will become even cheaper to run over time,” the report said.
Compounding the problem for gas is the fact that while renewables are becoming cheaper, the cost of natural gas has spiked around the world. Gas proponents argue that this is proof that more gas supplies are needed – that governments should greenlight more drilling – but Carbon Tracker argues the opposite.
The economics of gas “are growing in fragility.”
The economics of gas “are growing in fragility,” the report found. A 25 percent increase in natural gas prices in Europe over a 2018-2019 average would result in 40 percent of Europe’s gas fleet in unprofitable territory. A 50 percent increase in fuel costs would leave 74 percent of the continent’s gas fleet in the red. At one point in early October, gas prices at the Dutch TTF hub were up 400 percent since the start of the year as the global gas crunch hit hard.
By 2023, around half of Europe’s power plants will be costlier to operate when compared to building new solar and wind combined with battery storage. By 2030, 85 percent of those plants will be too expensive.
The U.S. is a bit behind these trends, due to cheaper supplies of gas. Nevertheless, by the end of the decade, half of U.S. gas-fired power plants will be costlier to run than building new solar and wind. Carbon Tracker finds that $16 billion worth of gas-fired power plants will be left as stranded assets as the world aims for net-zero emissions by 2050.
Golden Age of gas long gone
These findings offer a clear message to investors, Carbon Tracker says: “building new gas plants is ill-advised and will produce projects that are unlikely to yield returns on investment in most regions.” New proposed power plants should be scrapped, the report said.
The conclusions stand in stark contrast to years of predictions from the IEA and a long line of energy analysts that assumed never-ending increases in gas demand. Carbon Tracker says that gas will still play a role in the future energy system in the long run, but it will be mainly as a source of backup power generation.
Meanwhile, a separate report from the United Nations published in recent days adds more heft to the notion that the fossil fuel infrastructure building spree should end. The Production Gap report finds that the world is on track to produce twice as much fossil fuel than would be consistent with keeping global warming to 2-degrees-Celsius.
“Global fossil fuel production must start declining immediately and steeply to be consistent with limiting long-term warming to 1.5°C.,” the report said.
But, of course, few countries are taking this advice. Most major oil and gas-producing countries have plans to grow oil and gas production beyond 2030.
Most major oil and gas-producing countries have plans to grow oil and gas production beyond 2030.
In the IEA’s 2011 report declaring the “Golden Age of Gas,” they did get one thing right. The agency said that while natural gas might be cleaner than coal, “it is still a fossil fuel,” resulting in climate pollution. One of the agency’s scenarios at the time predicting rising gas use would put the world on a path of catastrophic 3.5-degrees-Celsius in warming. To head off such a disaster, the agency said, the world needed to shift faster to renewables and energy efficiency, a transformation that no doubt at the time sounded a bit far off into the future.
But as the Carbon Tracker report concludes, that shift is no longer out of reach. Indeed, given the superior economics, the clean energy transition is locked in and inevitable. The trick now is to stop digging the hole the world finds itself in and instead accelerate the trends that are already underway.