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As renewables costs decline, gas plants face obsolescence, report finds

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As renewables costs decline, gas plants face obsolescence, report finds

U.S. utilities and independent power plant developers have announced plans to spend $110 billion to build new natural gas-fired plants, many of which could become stranded assets not long after completion, according to a new report from the Rocky Mountain Institute.

The report compares the costs of new natural gas plants in four U.S. regions with those of "clean-energy portfolios" that include distributed renewable resources, energy efficiency and demand response programs. It found that in three of those cases, the capital costs of clean energy were between 8% and 60% below those of the gas plants. The same applies to operating costs; at $5.00/MMbtu, the costs of clean-energy portfolios will fall below the per-MWh cost of gas-fired plants in 2026 or shortly thereafter, the study found. At $3.00/MMbtu, clean energy will become cheaper around 2040.

"If we do build all those gas plants, with the continued reductions in [clean-energy] resource costs, it's not too long before it becomes cheaper to build a clean-energy portfolio than it is to operate a gas plant," said report co-author Alex Engel. "That puts us in the position of gas plants becoming stranded assets, even with the shinier newer higher-efficiency plants that are becoming available."

Rocky Mountain Institute is a nonprofit, nonpartisan advocate of market-based solutions that cost-effectively shift from fossil fuels to efficiency and renewables.

The report found that in many areas, "clean energy portfolios already outcompete proposed gas-fired generators," threatening "to erode their revenue within the next 10 years."

The study comes as regulators, environmental groups and customer advocates have begun to question the wisdom of continuing to pour billions into new gas-fired capacity in an era of flat demand for electricity, accelerating deployments of renewable generation capacity and rapid price declines for energy storage.

In January, California regulators ordered Pacific Gas and Electric Co. to solicit bids for energy storage and "preferred resources" such as energy efficiency, demand response and distributed solar to prevent the need for pricey contracts with three existing Calpine Corp. natural gas-fired power plants. The clean-energy resources must come online in time to avoid the renewal of the reliability-must-run contracts for the trio of gas plants in northern California — Calpine's 596.9-MW Metcalf Energy Center, 45-MW Feather River Energy Center and 45-MW Yuba City Energy Center. Those contracts are up for renewal in 2019.

"The same technological innovations and price declines in renewable energy that have already contributed to early coal-plant retirement are now threatening to strand investments in natural gas," the report said.

If carbon taxes or other penalties are imposed on carbon emissions, those investments will be stranded even earlier. Eighty-three percent of the planned gas plants are in deregulated markets where independent producers will bear the market risk if those investments become stranded. The remainder, representing $19 billion in investment in gas-fired capacity, are in regulated markets where ratepayers will be on the hook if revenues decline and the plants face early retirements.

To avoid that outcome, "regulators should carefully consider alternatives to new gas power plant construction before allowing recovery of costs in rates," the report said.