Will Rising Natural Gas Costs Change Long-term Electric Supply Plans?
by Bob Shively, Enerdynamics President and Lead Facilitator
One measure of the lifetime cost of a specific generation technology is the Levelized Cost of Energy (LCOE). The LCOE estimates the average cost of generating electricity in $/MWh across the life of a model generating unit. This includes initial construction costs as well as ongoing operating, fuel, and maintenance. And while the LCOE is not a full measure of the value of a specific unit since it does not include factors such as operational flexibility, dispatchability, capacity value, risk of fuel cost fluctuations, and various local transmission or interconnection issues, it is useful as a means of capturing relative costs between different generation technologies.
In a 2020 blog post, we noted that wind and solar were the cheapest sources of new electric supply even without any governmental subsidies. This remains true in the latest version of the Lazard’s Levelized Cost of Energy Analysis released in late 2021:
As we noted in our earlier blog, the levelized cost for newly built utility solar and onshore wind is less than the midlevel operating cost of the average existing coal unit, which came in at $42/MWh in Lazard’s latest analysis. Not surprisingly, coal net capacity in the U.S. declined by 33 GW between 2016 and 2020, and it is forecast by the U.S. Energy Information Administration (EIA) to decline by an additional 30 GW by 2025.
But the levelized cost for new wind and solar still was still significantly higher than the variable operating cost of the average gas combined-cycle unit estimated in the latest Lazard analysis at $24/MWh. This analysis used a natural gas price of $3.45/MMBtu, which at the time seemed like a very reasonable number. But since the analysis came out, natural gas prices have spiked:
So, what will be the impact if the current increase in natural gas prices is long-lasting and not a temporary spike? Let’s say we use a gas price of $6.00/MMBtu instead of $3.45. Looking at a combined-cycle gas turbine unit, and assuming a typical 7,200 Btu/kWh heat rate, the variable fuel cost of the unit increases to $43/MWh. Remembering that this is only operating costs we see that gas units are significantly less competitive with renewables than they were six months ago.
Recent utility resource plans, while including significant amounts of wind and solar, have in many cases also included large amounts of natural gas capacity. Many utilities have argued that new natural gas generators are necessary to provide needed reliable capacity and flexibility. But if natural gas prices stay where they are now, these utilities will pay a high price for these resources. Instead, they may pivot to a new world of reliable capacity and flexibility provided through storage and demand response.
While you may read headlines about how high gas prices have resulted in more use of coal generation, the cost data suggests that the long-term effect is to further expedite our movement to increasing amounts of renewable energy.
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