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PG&E urged to swap Calpine gas plants for batteries

The California Public Utilities Commission proposed Pacific Gas and Electric Co. seek bids for battery storage and other "preferred resources," such as distributed solar, energy efficiency and demand response, to "obviate the need" for expensive contracts with three existing Calpine Corp. natural gas-fired peaker power plants in northern California, the regulator said in a proposed decision.

If approved at the commission's Jan. 11, 2018, voting meeting, the PG&E Corp. subsidiary would be required to solicit bids within 30 days for energy storage and preferred resources to replace the gas contracts in 2019.

Calpine's 596.9-MW Metcalf Energy Center in Santa Clara County and its Yuba City Energy Center and Feather River Energy Center, both 45-MW facilities in Sutter County, are designated by the California ISO as must-run resources for the sake of reliability. In November, Calpine filed contracts for the three plants with the Federal Energy Regulatory Commission. Both PG&E and the PUC, however, have opposed the contracts, citing potentially less expensive nonfossil alternatives that could also provide reliability.

"These new resources could eliminate the need for the [reliability must-run contracts] ... or limit their duration," the commission said in its proposed decision, warning of "market distortions" created by the agreements. The must-run contracts cover the full cost of keeping the facilities available, even though they would only operate in specific situations, which "can cause ongoing market distortions" by creating a "disincentive" for participation in conventional energy markets, the regulator cautioned.

"Energy storage and preferred energy resources can be constructed in a short timeframe, and may be able to be brought online in sufficient time as to obviate the need for [must-run] contracts," it added. As proof, it pointed to Edison International subsidiary Southern California Edison Co.'s expedited procurement of energy storage in 2016 due to possible natural gas interruptions related to Southern California Gas Co.'s troubled Aliso Canyon reservoir. "As a result, more than 100 MW of grid-level energy storage are currently operating and contributing to reliability."

'Under threat by energy storage'

The proposed move may be part of a bigger trend for battery storage as a substitute for gas peakers. "We see 6.5 to 10 GW of opportunity for energy storage over the next decade specifically for peaker replacement," Shayle Kann, head of GTM Research, said in an interview. Kann cited the California Energy Commission's recent decision to suspend NRG Energy Inc.'s petition to build its 262-MW Mandalay Generating Station CT (Puente Power Project) in Oxnard, Calif. The decision came after energy storage groups cited misleading cost estimates of energy storage as an alternative to the gas plant.

"Utilities and regulators often rely on outdated cost information, and with energy storage in particular, because costs are falling so fast, you have to be up to date," Kann said. "If you are not up to date, you are going to think it's too expensive even if it might not be."

GTM Research, a unit of Wood Mackenzie, estimates there are more than 20,000 MW of natural gas peakers either in the planning stages or required to be added over the next decade due to the expected retirement of other resources, mostly older gas plants. "Purely on an economic basis, a fair amount of that should be at risk," Kann said. "Anywhere from a third to half of it should be under threat by energy storage," depending on whether regulators and utilities "actually are doing the right kind of analysis."

Recent analyses by Lazard Ltd. estimated the levelized cost of energy from gas peakers in 2017 between $156/MWh and $210/MWh, compared to a levelized cost of storage for peaker replacement of between $209/MWh and $413/MWh. Within four years, however, GTM sees storage competing head-to-head with gas peakers on cost and always winning within 10 years.