Renewables capturing market from gas-fired generation

The accelerating transition toward a low-carbon future promises a slow decline for gas-fired power generation in the years ahead as wind and solar continue to gain traction, propelled by low costs and mounting policy pressure for adoption.

In 2020, natural gas accounted for a record 38% of total power generation in the US. By the early 2030s, its market share is now forecast to fall below 30%. Over the same decade-long period, total generation from wind and solar is expected to climb from just 11% in 2020, to more than 30% by 2030, according to a recently updated reference-case forecast from S&P Global Platts Analytics.

In the 2030s and beyond, as the energy transition unfolds, the trajectory of individual gas-fired power plants will vary widely depending upon their location and the prevailing market and policy environment.

ADDITIONAL COVERAGE: Natural Gas in Transition

For some gas generators, their success may be determined simply by a favorable market location, but for many other existing and new-build plants, adaptive strategies will become key to their survival.

In the latter case, the adoption or blending of low-methane gas, renewable gas, or hydrogen could allow generators to compete effectively with renewables. For generators continuing to burn traditional natural gas, the integration of carbon capture and storage may be another critical adaptive strategy. For still other generators, retrofits and re-toolings could allow traditional combined-cycle units to operate in peaking markets at lower capacity factors, potentially delaying their early retirement.

Renewable growth

Such adaptive strategies have yet to be adopted by most gas-fired power plants. In some corners of the US market, though, gas generators are already feeling the heat from renewable growth.

In the Southwest Power Pool, where much of the US wind capacity is installed, wind has generated an average almost 260,000 MWh/day through early June 2021 – its output growing by more than 54% since H1 2018. Over that same period, total generation from gas in SPP has declined by more than 32% to average just 134,000 MWh/day this year, SPP data shows.

The size of wind generation's market and its dominance in SPP are unique, but its growth trajectory is not. In both the Midwest Independent System Operator and PJM territories, wind power has grown by 45% and 29%, respectively, since 2018, generating an average 218,560 MWh/day in MISO and 86,263 MWh/day in PJM this year, based on MISO and PJM data.

Across the US, power generation from wind has grown at an exponential pace since the early 2000s. According to the US Energy Information Administration, wind generated just 6 billion kWh in the year 2000, accounting for only 0.1% of total US generation. By 2020, wind power had grown to 338 billion kWh, representing 8.4% of total US power generation.

According to the EIA's Annual 2021 Energy Outlook, generation from all renewable sources should surpass the individual outputs of both coal and nuclear by later this year. Around the end of this decade, the agency's model also predicts renewables, collectively, to eclipse total gas generation.

Renewables vs. gas

From a cost perspective, the recent growth in renewable power makes sense.

According to financial-advisory and asset-management firm Lazards, the costs of both wind and solar power have already undercut the comparable cost of even the cheapest combined-cycle gas plants. In a levelized cost of energy analysis — which accounts for capital costs and excludes subsidies — solar power now prices at just $29/MWh with wind as low as $23/MWh. By comparison, gas-peaker and combined-cycle plants bottom out at $124/MWh and $41/MWh, respectively.

From a policy perspective, renewables also appear well-positioned to compete with gas generation.

Across the US, state clean-energy mandates and incentives are already in place in many markets. Most set targets for power generation from renewable sources but vary widely in their ambition. In the Midcontinent, many states target minimum retail-power sales from renewables. In other states, stricter mandates look to phase out gas entirely. Washington, Nevada, New Mexico, and New York have all set renewable and carbon-free electric generation standards for the coming decades. California has targeted 100% carbon-free retail sales by 2045.

Even at the federal level, many analysts now see a brighter outlook for a national clean energy standard that would accelerate natural gas' decline in the power sector. With the recent change in US presidential administration and the various congressional bills proposed — most notably the CLEAN Futures Act — Platts Analytics has updated its long-term power forecast to reflect the much greater likelihood of a national renewable energy standard, instead of the previously anticipated carbon cap-and-trade program.

Gas generation in the 2030s, 2040s

While the adoption of a national clean energy standard would put additional competitive pressure on gas generators, the market environment in some states could still provide an opportunity for gas-fired power to prosper through the 2030s and 2040s — even without significant, material changes to existing business models.

One potential opportunity for gas generators could come in market locations where renewables operate at relatively low capacity factors.

"The best wind and solar locations are being exhausted [and] multi-jurisdictional transmission is difficult to get permitted," says Gurcan Gulen, principal at Boston-area energy consultancy G2 Energy Insights.

"These conditions imply that we would have to build even more capacity in locations where capacity factors are lower" — resulting in significantly higher expenditure for renewable development.

Another opportunity for gas-fired power generators could come in market locations where state-level carbon-free electric generation mandates are absent. In those locations, the time-limited discharge capacity of lithium-ion batteries could allow gas to be used as a seasonal or even diurnal balancing tool for variable electric generation from renewables.

According to Morris Greenberg, senior manager for North American power at Platts Analytics, the relative competitiveness of natural gas will also depend on the restrictiveness of both federal- and state-level clean energy mandates. Whether such policies allow some CO2 emissions, or zero, matters. So also do the location-specific costs of renewable power and of carbon capture and long-duration storage.

"Even with a zero-emissions target, retaining some gas-fired capacity as a backup energy for grid support is likely to be much less expensive than foregoing that option," Greenberg said.

Adaptive strategies

In markets where natural gas faces fierce competition from renewables and thus greater potential for its early retirement, generators may opt to pursue adaptive strategies to ensure success.

For some, the adoption or blending of low-methane gas, renewable gas, or even green or blue hydrogen could be a successful strategy that also ensures compliance with federal and state regulations.

This spring, the US' largest gas producer, EQT, already took its first step toward becoming a supplier of certified low-methane fuel, saying its Marcellus shale output would undergo an independent assessment of its environmental impact. In the future, power generators could pay premium prices for such fuel.

With pipeline operators such as Kinder Morgan, Enbridge, and Williams already expressing their interest in hydrogen blending, it's also possible that some generators could opt for — or otherwise be required to use — hydrogen-blended methane as a feedstock fuel. According to Greenberg, combined-cycle gas plants could be retrofitted to burn pure, carbon-captured blue hydrogen reformed from natural gas.

In cases where the adoption of alternative feedstocks is potentially cost-prohibitive, the retooling or retrofitting of certain combined-cycle gas units could allow them to operate at lower capacity factors — potentially cycling on and off to meet demand in peaking markets.

According to S&P Global Market Intelligence analyst Alex Cook, traditional or retrofitted gas-peaking plants could endure over the longer term, even in a low-carbon environment – particularly in locations where they can clear capacity markets — such as the US Northeast.