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Does sub $2 sustained natural gas prices pose a threat to renewables from a free market economic dispatch viewpoint?

Patrick McGarry's picture
Senior Director / Customer Success PCI

Patrick recently joined PCI as a Senior Director in May, 2019. He owns over 32 years of experience in commodity trading and owns an extensive record working closely with energy market...

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  • Jul 8, 2020

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A friend of mine suggested a good rule of thumb was that natural gas fuel prices translate roughly to 0.7 cents per KWh per dollar per MMBTU.   If I were to put a little time into the question (which I'm skipping now, but some of the others here might be able to do faster) I could probably define the efficiency of the natural gas plant my friend is using as a baseline.    The thing is that U.S. natural gas plants average 45% efficient - rising a tiny bit every year - and that the low price of gas still doesn't ensure that a lot of the plants are competitive with new wind and solar prices when operation and maintenance costs are included.

I agree that for the time being the resource which is threatened is coal.   I observe that nuclear plants tend to be cheap for a long time until they are not, and once they are not, most of them will retire.   Not everyone is going to give the nuclear plants a handout at ratepayer expense for the sake of protecting a handful of jobs at the expense of many more jobs due to the rate increase.

In 2019 the rate of new wind and solar plus our current rate of energy efficiency (something that is left out of the conversation all too often, since in 2019 utility efficiency programs saved three times as much energy as new wind or new solar produced, and the Federal Appliance Standards saved slightly more than new wind or new solar) was five times the current rate of nuclear retirement.   I expect nuclear retirements to speed up though.

The thing about this conversation is that the regional differences are so large - of course those affecting wind and solar are, but natural gas is also highly sensitive to regional differences - that it isn't really possible to generalize.

We are seeing some contracts for wind and solar under the lowest possible price for any natural gas plant.  Before there is a real face to face conflict between renewables we are going to see more wind and solar picking up momentum against coal, and I firmly expect that we will see some pretty wild rides in the price of gas.

That is more dangerous to gas than it may seem.  But there's another facet to this:  Let's start with this announcement:

It is an EIA post from February (before the virus).   The text says that 76% of all new generation expected in 2020 will be wind and solar.   What it doesn't say, but the numbers say is that wind construction in 2020 is likely to be double the amount in any year since 2013, and to be a new all time record year almost 50% higher than 2012, which is the current record year.   Solar is expected to be 50% higher than any year since 2017, and about 20% higher than 2016, which is the current year.

The expected 2020 renewable construction is also almost a third of the rate of construction needed to eliminate all fossil generation well before 2030 and to eliminate all fossil fuels, assuming we do the right things with the added electricity, by 2040.

As a long time climate activist whose path has been lonely, since I only promote things that cut emissions and also save money, I join in the shame of my lot for failing to associate the known harm from fossil fuel air pollution in a concrete way before this.   The COVID-19 lockdowns have given much of the world a sample of what it would be like if we replaced all our fossil fuels with renewable energy.

Ending fossil fuel pollution in the U.S will save 100,000 lives per year, and eliminate 10 million doctor visits for pollution-induced medical problems every year.   This would be justification enough for replacing fossil fuels with renewables at a break-even or a small cost.   But my way of looking at things see this:   We will build wind and solar until we have eliminated 80% of fossil fuel generation and whatever nuclear retirements occur in that time.   What will be left is the most efficient of the natural gas plants, which are also the most recently constructed, and the ones that owners will be most reluctant to retire soon.

Around that time, and not before, we will begin having enough excess wind and solar generation that it makes economic sense to use that electricity, which may be discounted because it is above consumption - to produce hydrogen.   The hydrogen can be stored in existing natural gas storage facilities and used in those remaining natural gas plants.  There are several versions of this projection, and I have no opinion about which one will rise to the economic surface.   They include a cheap process for converting renewable hydrogen to methane, and more rapid development of electric cars, electric heat pumps, and other industrial processes which erode non-electric fossil fuel production and sales.

This really is a pretty firm path, if we agree that renewables aren't likely to get more expensive, and that natural gas isn't going to be produced at a much lower cost for very long.  The only uncertainty is how fast we follow it.

According to several recent announcements, the virus isn't doing much to slow down the EIA projection for new wind and solar.   Further, U.S. resistance or foot-dragging will not be replicated in most of the rest of the world and we will suffer if we lose more of our technological lead in this race.

I think that people who look at this from the perspective of preserving natural gas as a resource are challenged more by the Saudi control of the price of oil than anything else.   In the U.S., oil and gas tends to come out of the same wells, and for a long time oil prices have supported gas.   If that support is substantially weakened, one could imagine natural gas prices picking up some of the weight, but that would require higher natural gas prices.

I think we should celebrate the nearing end of fossil fuels, and will work to promote that in every way that ensures lower energy costs for everyone.   The cost of wind and solar dropped about 40% in late 2017, and the EIA notice is a reference point for how fast the electric utility market moves in response to price signals of any sort.  This is a global transition, and U.S. opinions need to be realistic in that light.  We have lost a lot of our leadership in renewables, and have neglected the importance of our abilities with efficiency technology and strategies for far too long.  The virus makes the dirty air visible by temporarily removing it, an the virus creates an economic demand for the huge new investments, jobs and growth that will result from an intentional increase in new wind and solar construction - and expanding utility efficiency programs.  U.S. electricity could be cut by 1% per year by bringing the utility efficiency programs in 44 states up to the level of the best six states.

There's no good place to end this statement.  It's a start.   Not an end.

Economic dispatch selects the lowest bid price on any particular system (ISO).  In principal, it is expected that no one will bid below their marginal cost of operation.  The marginal cost of renewables is not zero.  As pointed out below, there are maintenance items that need to be addressed which add cost in the form of both labor and materials.  The marginal fuel cost may be zero, but the full marginal cost is not zero.  For those renewable plants with low capacity factors, the operating and maintenance costs can be fairly high (relative to a base loaded combined cycle plant).  Thus, there will be some cases where a base loaded combined cycle plant with a 6300 BTU/Kwhr heat rate at site conditions on an HHV basis could have a lower marginal cost with sub $2 gas than a solar PV plant in New England with an 11% capacity factor.  Rough numbers would be 2 cents/Kwhr for the O&M cost of the PV plant vs 1.1 cents/Kwhr fuel cost and 0.8 cents/Kwhr for O&M cost for the combined cycle plant.  Gas fired plants that are not base loaded will experience higher O&M costs and higher fuel costs as the heat rate degrades with lower loads, the equipment degrades with more start ups and shut downs, and the fixed O&M costs are spread over fewer operating hours.  Of course, not every location will have the same operating profiles.  This analysis also implies that there are no subsidies or penalties associated with the two technology choices.  Thus, the "answer" will be site specific.  The investment problem is somewhat different.  Low gas prices, as pointed out below, will lower the projected revenues of any plant.  That will impact the economic analysis that will be done to determine the overall profitability of the plant.  With less overall revenue and a relatively low capacity factor, the overall economics may not look so good for a renewables plant, as pointed out below.  That may impact the willingness to invest in a new plant.  Again, each plant will likely be site specific.  If a new gas plant will need a new pipeline connection of any significant length, the added costs to get permits and construct the pipeline addition could overwhelm the plant economics.

Patrick McGarry's picture
Patrick McGarry on Jul 17, 2020

Carl- Thanks for taking time to provide a thoughtful answer.

Ever since the pandemic began and nat gas crashed, there seems to be renewed talk of implementing a carbon price on nat gas generation. While I realize there has always been talk of trying to devise a carbon market, the renewed interest seems tied towards the competition with natural gas. Therein lies the purpose of my question. Is the lower price of nat gas hurting the economics of renewable energy generation projects.

If public policy is deemed to want x% of renewable energy, I think that is ok ( as long as reliability is not impacted) and that the public and our regulators understand the true cost of doing so.

Thanks again for your response.

In regards to solar and wind, I agree, the "fuel" is free, but the rest is not.


If gas was to be sub$2 and carbon removal/storage is ever developed that is cost effective and you have a true open market, then renewables will be greatly impacted.  The real, im my opinion, issue is that renewables will be chasing their own cost curves ever lower.  When this happens, the existing facilities will have a hard time covering their ongoing cost and the capital replacement costs since as inverters, panels, motors, etc. that have failed or degraded to an inefficient point where replacement is needed.  I would be surprised that the market pricing will be high enough to cover these costs in the long run.  Unless there is a combination of renewables with storage that allows for full dispatch, then these resources will be at a disadvantage under a true open market.  The other big threat will come from hydrogen.  If CTs, CCs, and other similar generation resources are fuel by cheap hydrogen, solar and other land intensive resources will go the way of coal.



Given the fact that power and gas prices are - most of the times - changing, my preference is for "cost arbitrage". 

Let me give you a real life example. At my home we do have gas water heaters and an electric tank heater. We chose which to use depending on the ongoing prices. 

Of course it is a higher CAPEX but in the long run it pays off and by far!

It is too difficult - actually impossible - to predict gas and power prices. So having this "portfolio" enables reaching and maintaining the minimum cost ALWAYS.

From the perspective of "free market economics", renewables which have zero variable costs and are (largely) non-storable should only see an impact on dispatch (i.e. curtailment) in cases when total generation is higher than demand. There are several exceptions to that premise:

1) hydro generation (other than run-of-river), which can be "stored" in the dam

2) strategic curtailment by plant operators in cases where this impacts the clearing price

3) gas prices that are sub-$0 rather than just sub-$2 (which have been seen on a localized basis).

Away from that, as Mike Byrnes points out, there could be a longer-term development impact on renewables projects though the economics are mostly not that marginal. 

In the short run I see low gas prices hurting the development of renewables.  End users will evaluate the renewable project against the status quo.  In this case if electricity and thermal energy are cheaper due to low gas costs  your pro-forma looks worse and you are less likely to move forward with the renewable project.  I think this will affect anyone who is not a utility.  Utilities still have Renewable Portfolio Standards to comply with and large projects are already under way. 

In the short term Coal is threatened not Gas but as we go forward and as CO2 pricing becomes more significant so will Gas....

In my view, renewable generators are not threatened by low gas prices because the renewables have one key distinguishing feature - no CO2 emissions, which the gas units cannot claim. In today's environment with States demanding zero-emission energy solutions, there is no threat so long as the States pursue "zero emission energy targets", all Gas plants are unable to compete on this factor alone.


Scott, California and other states enforce a loading order that requires renewables be loaded first when available, so "a free market economic dispatch" doesn't exist.
Renewables aren't threatened at all by gas, and never will be. Gas will always allow their token place in energy production, while maintaining the fantasy one day in the future they'll step aside and let solar and wind take over. In that astroturfing role, solar and wind are indispensable.

Roger Arnold's picture
Roger Arnold on Jul 12, 2020

I'm not sure how California's "must take" provisions operate. If there's a minimum price at which RE must be taken, then you're right, it's not a free market.

I suppose there must indeed be a mandated minimum price, because otherwise a "must take" provision is meaningless. Since the marginal cost of production from RE resources is zero (or negative, given PTCs), any RE source with power to sell can underbid any fuel-based power resource. Curtailment and negative pricing only happen when total supply from RE sources exceeds total demand.

Bob Meinetz's picture
Bob Meinetz on Jul 14, 2020

Roger, different commercial solar farms can bid against each other in California, so there might not be a mandated minimum price. If there is, it's another market distortion - in essence, another subsidy.

Wholesale markets in U.S. electricity are "free" like the government of the Russian Federation is a democracy.

"Curtailment and negative pricing only happen when total supply from RE sources exceeds total demand."

Not exactly. CAISO has designated certain dispatchable plants - gas and nuclear - as Reliability-Must-Run (RMR) plants, so solar and wind farms bid against each other to meet "net" demand. Despite solar advocates claiming this amounts to a subsidy for baseload (dependable) plants, there are enough smart people at CAISO who know better. Diablo Canyon, as a "price taker", bids $0 and is awarded the highest price of all bidders. That's why, with few exceptions, it runs 24/7/365.

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