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Bright Light, Big Wind Chasing Natural Gas Market Share, Says Raymond James

Natural gas generation has been the biggest beneficiary of market share as coal generation declines, but the “principal winners” in the U.S. electricity mix eventually will be wind and solar, according to Raymond James & Associates Inc.

Gas still has some room to increase its share of the generator mix, but the analyst team led by Pavel Molchanov said it is “increasingly confident” that the improving economics of wind and solar may be difficult to ignore.

“Wind economics, on average, are already at cost parity with gas, and solar’s faster cost reductions mean that it is heading toward the same endgame,” Molchanov said in the firm’s latest Energy Stat.

The base assumption by Raymond James analysts is that wind and solar will capture two-thirds of incremental U.S. share over the medium-term, with gas holding the remaining one-third.

Analysts routinely are asked why gas would not do better than capturing only one-third of the share, particularly as federal tax credits for renewables begin to phase out in the coming years.

“Our conclusion is that onshore wind, even without tax credits, is already matching gas as the two lowest-cost U.S. sources of utility-scale newbuilds, albeit with site-specific variability,” Molchanov said. “Solar is not quite there yet, but its costs are falling faster, so it is only a matter of time.”

While gas holds some advantages, especially for dispatchability, grid-scale batteries are moving slowly into the mainstream, and the combination of renewables and storage increasingly will pose a threat to gas peakers, he said.

Gas-fired plants have higher costs for gas supply, labor and other plant-level cash operating costs, Molchanov noted. “By contrast, the cash costs of wind and (especially) solar projects are minimal.”

The key metric to apply an apples-to-apples comparison, which takes into account all of the moving parts, is the levelized cost of electricity (LCOE), which represents the per-kWh cost, in discounted real dollars, to build and operate a power plant over an assumed asset life, Molchanov said. And newbuild economics “are what matter for future investment decisions by generators.”

Excluding the production tax credit benefit for wind, the LCOE averages around $0.041-0.077/kWh, which is almost a two-times spread between minimum and maximum, Molchanov noted. Excluding the investment tax credit for solar, the spread is nearly three times.

“Gas plants also have variability, though not quite to the same extent. Thus, there is no universal answer to the question of whether wind economics are better than gas.”

Overall, wind newbuilds are cost competitive with gas newbuilds, according to Raymond James analysis, with the midpoint for wind ($0.059/kWh) only slightly lower than advanced combined-cycle ($0.06) and conventional combined-cycle ($0.062).

The analysis included exploration and production industry tax incentives, such as intangible drilling costs, which indirectly help the economics of gas-fired plants by increasing drilling and thus supply. 

Some wind projects just screen better than some gas projects, and vice-versa, Molchanov noted. For example, the top three states for wind penetration are Iowa (37% of the electricity mix), Kansas (36%), and Oklahoma (32%). Offshore wind projects continue to be a niche market, and they cost more to operate.

Utility-scale solar costs are higher than those for wind, but costs are coming down fairly quickly, according to Molchanov. Solar LCOE is more variable depending on location than wind is, and while nearly all wind installations are utility-scale, about half of U.S. solar market is distributed, i.e. commercial and residential rooftop systems.

The cost structure for solar projects starting construction in 2019 or 2020 should be much different than today’s newbuilds, as module prices are declining much faster than wind turbine prices and are down 70% in five years.

The ‘BiGW’ Battery

Still, there are major hurdles to wind and solar completely eclipsing natural gas. The top impediment is intermittency, or lack of dispatchability, Molchanov said.

“The ability to efficiently store electricity on a large scale is important to maintain a stable grid without constant over- and under-supply. For now, peaking power plants play the main role in balancing the grid, but grid-scale storage is becoming an emerging substitute for peakers.”

An inflection point may occur in the next five years or so, as as battery system costs approach $600-700/KW.

“In the U.S., where gas peakers are the most prevalent, we would suggest that 100 GW by 2030 is a reasonable base case guesstimate,” Molchanov said. “This would not only slow down (eventually, even halt) gas peaker newbuilds, but it would also lead to shutdowns of some existing plants.

“Under an aggressive scenario, it is possible that half of all gas peakers will be either shut down or under an imminent threat by 2030. As with coal retirements, the older, less efficient plants will be the first to get the axe.”

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