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High gas prices make renewable energy more competitive, even without tax credits: NextEra

Highlights

Gas prices remain elevated in wake of Russia-Ukraine war

After collapse of climate bill, future of tax credits unknown

Despite the US Congress' failure to extend tax credits for renewables, NextEra Energy executives said July 22 they were confident that renewable energy will be a competitive option for the foreseeable future as high natural gas prices are expected to remain elevated.

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"As renewables continue to get cheaper and cheaper over time, gas generation – which is what we primarily compete against – continues to get more expensive," NextEra President and CEO John Ketchum said during the company's second-quarter results call. "When I think about gas prices today, we think they're going to remain elevated over a long period of time."

Upward pressure on global energy prices in the wake of the Russian invasion of Ukraine has kept US gas prices in the upper registers for months. Spot gas prices in Florida, NextEra's service area, have soared so far this summer as the state's reliance on gas-fired generation increased. Total Florida gas demand has averaged 4.74 Bcf/d month to date, up 393 MMcf/d, or 9%, from last July. Florida, Zone 3 spot gas has averaged $8.92/MMBtu for May 1-July 21, nearly three times the $3.28/MMBtu averaged for the same time last year.

Although Florida gas prices often trade at a premium compared to national benchmark Henry Hub, due to the state's lack of gas storage and limited pipeline options, premiums to cash Henry Hub have also exploded this July. Cash Henry Hub averaged $7.57/MMBtu for May 1- July 21, compared with $3.21/MMBtu for that same period in 2021, according to S&P Global Commodity Insights.

And NextEra expects those prices to remain high owing to a variety of factors: lack of pipeline infrastructure, significant demand for LNG exports to Western Europe, and the massive amount of coal retirements that has made it hard for power producers to switch from gas-fired to coal-fired generation during periods of high gas prices. As of April, the US power industry had retired nearly 6.4 GW of coal-fired generating capacity over the previous 16 months.

"I just think that there are a lot of headwinds that gas prices are facing today," Ketchum said. "I think for all those reasons, we're going to continue to see upward pressure on gas prices."

Renewable energy costs, on the other hand, have become increasingly competitive this year vis-à-vis gas, and the company says it will continue to be so even in 2024 – when solar investment tax credits are expected to phase down to 10%. (Production tax credits for wind projects expired at the end of last year).

According to NextEra's Q2 earnings report, the company projects a $30/MWh cost for new build solar and a $20/MWh cost for new build wind assuming renewable tax credits aren't extended. Compare that to the $80/MWh of a Florida combined cycle gas plant buying FGT Zone 3 gas at current prices of over $12/MMBtu. Or a plant buying gas at Henry Hub rates of $8/MMBtu and producing power at $53/MWh. Looking ahead, Henry Hub 2024 prices of $5/MMBtu could generate power at around $35/MWh, according to Platts Analytics.

While NextEra isn't assuming tax credit extension will come to pass, Ketchum said the company will be looking to the Biden administration's climate actions following the collapse of Democrats' reconciliation bill, which included a package of clean energy items and tax credit extensions. On July 14, Senator Joe Manchin, Democrat-West Virginia, doomed the bill when he announced his withdrawal from negotiations with his Senate colleagues, leaving Democrats one vote shy of a majority.

Without congressional action, the White House said July 20 that it will begin announcing a series of executive actions to support clean energy projects and address climate change, beginning with one aimed at expanding offshore wind opportunities in the Gulf of Mexico.

"I think reconciliation is somewhat unlikely, obviously, given the positions that have been taken over the last week or so," Ketchum said. "Our focus is really on [tax credit] extenders and on executive actions.

"I think executive action, particularly given the statements that were made by the president at the end of last week, there are definitely some things we can do there," he said. "We will continue to work it. We have a number of ideas on our list that we are pursuing at different levels. I'll leave it at that."