Giant batteries drain the economics of gas power plants

LONDON (Reuters) – Giant batteries that ensure stable energy supplies by offsetting intermittent supplies of renewable energy have become cheap enough to make developers abandon dozens of gas-fired projects around the world.

The long-term economics of gas-fired plants, which are used in Europe and some parts of the United States primarily to compensate for 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.

Some battery operators are already supplying grids with backup power at a price competitive with gas power plants, meaning less gas will be used, they said.

This shift challenges assumptions about long-term gas demand and may mean that natural gas has a smaller role in the energy transition than the largest listed energy companies assume.

In the first half of the year, 68 gas power plant projects were suspended or canceled globally, according to data provided exclusively to Reuters by the US-based non-profit Global Energy Monitor.

The latest cancellations include the decision announced by Competitive Power Ventures, the power plant developer, in October to abandon a gas plant project in New Jersey in the United States. She pointed to low energy prices and the absence of government support, without providing financial details.

Independent British company Carlton Power dropped plans for an 800 million pound ($997 million) gas-fired power station in Manchester, northern England, in 2016. Reflecting the shift in the economy in favor of storage, it this year launched plans to build one of the world’s largest batteries. On site.

“In the early 1990s, we were running base load on gas stations, and now they’re turning over probably 40% of the time, and that will come down to 11%-15% in the next eight to 10 years,” CEO Keith Clark said. At Carlton Power for Reuters.

Without providing details on the pricing, which the companies say are commercially sensitive, Clark said Carleton had difficulties financing the planned gas plant, partly because of uncertainty about the revenue it would generate and how many hours it would operate.

Models under scrutiny

Analysts said developers can no longer use financial models that assume gas power plants will be used continuously over their 20-year-plus lifespan.

Instead, modelers need to forecast the amount of gas generation required during times of peak demand and compensate for the intermittency of renewable sources that are difficult to predict.

“It has become more complex,” said Nigel Scott, head of structured trade and commodity finance at Sumitomo Mitsui Banking Corporation.

He added that investors are increasingly scrutinizing the models.

Three bankers involved in financing energy projects said that the banks focus on financing factories that have guaranteed revenues, and they requested that their names not be revealed because they are not authorized to speak to the press.

Many countries around the world, especially in Europe, offer payments for standby power plants through capacity markets. In these markets, energy producers try to be backup suppliers.

This system has long been criticized by environmental activists on the grounds that it could amount to subsidizing fossil fuels. Advocates say it’s essential to ensure smooth integration of renewable energy, and that payments could reward batteries as well.

Those selected are paid to provide backup generation to keep plants operational at short notice to meet peak demand, to cover outages at other plants, or to make up for variability in wind or solar generation.

These payments can improve the economics of gas-fired plants, but are insufficient to guarantee long-term profits.

Carlton Power was awarded a capacity auction contract for its planned UK gas plant, but was forced to abandon it due to delays in securing investment due to uncertainty over future project revenues.

The UK first introduced a capacity market in 2014, and more than a dozen countries have followed suit with similar schemes.

Battery and interconnection operators are also participating in these auctions and have begun winning contracts.

The cost of lithium-ion batteries fell by more than half from 2016 to 2022 to $151 per kilowatt-hour of battery storage, according to BloombergNEF.

At the same time, renewable energy generation has reached record levels. Wind and solar power generated 22% of the EU’s electricity last year, nearly 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, fossil fuel power plants dominated production capacity markets, providing a flexible supply of electricity,” said Simon Fairley, head of energy at KPMG. Batteries, interconnectors and consumers switching their use of electricity now provide this flexibility, Fairley added.

Increased risks

The March commissioning of British energy company SSE’s Keadby 2, a gas power plant in eastern England, was supported by a 15-year government contract signed in 2020 to provide backup electricity services to the grid from 2023/24. The company financed the plant before it received the reserve 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 make an investment decision without revenue security through some mechanism now because of the inherent risks associated with revenue security,” Sanders said.

“If you’re investing in something that’s based solely on exposure to the commercial market, you’re really going to have to see very high energy prices, if you’re just working fewer hours.”

Efforts to cut carbon emissions may add another cost to fossil fuel plants: countries including the UK and the US are considering requiring operators to retrofit plants with carbon capture infrastructure.

EU rules introduced in January require gas plants seeking green financing to be built with carbon capture or be able to switch to using low-carbon gases such as hydrogen from 2035.

Kill switches, electric vehicles

As the pace of the energy transition increases, other developments may reduce the need for backup plants.

UK energy retailer Octopus Energy last year ran trials that offered to pay households a small fee to stop using electricity for an hour at a time during periods of strong demand.

The experiments covered the equivalent amount of energy demand that could be met by a small gas station, or what could be saved by turning off more than half of London for an hour.

Electric cars are an additional inconvenience as they can charge when demand is weak and then power homes or return power to the grid during periods of peak demand.

A typical electric vehicle remains parked 90% of the time with a battery capable of storing enough energy to power an average modern home for two days, energy software platform Kaluza said in a report published last December.

In Europe, there are expected to be 40 million electric vehicles by 2030, capable of displacing about a third of the region’s gas power generation capacity, according to Kaluza.

“There are a lot of things the grid can look at as it starts to move away from traditional generation,” Carleton’s Clark said.

($1 = 0.8025 pounds)

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