Europe

Loss-making Gas Sector Putting Investors at Risk

Carbon Tracker urges switch to clean energy as profitability of gas-based power generation faces further pressure from price volatility and net zero targets.

Over a fifth of European gas-fired power plants and nearly a third of US units are lossmaking, with surging fuel prices threatening to nudge more toward insolvency.

A new report from UK think tank Carbon Tracker also revealed that developers of most gas plants currently planned or under construction will never recover their initial investment.

Carbon Tracker said more than US$24 billion is at risk in the US and nearly US$3.5 billion in the UK, even if plants run for their full planned lifetime.

This is because governments’ net zero 2050 commitments will require most gas plants to be closed early unless there is significant progress in abatement technologies to reduce or mitigate emissions.

Carbon Tracker urged fossil fuel investors to switch to renewables to help the planet and their pockets.

“The long-term use of unabated gas for power generation is incompatible with climate targets, and units are unlikely to run for their full lifetimes. Investors who continue to back gas ahead of renewables are not only exposing themselves to the risk of stranded assets but are also potentially missing out on higher rates of return from the clean energy sector,” said Jonathan Sims, Carbon Tracker Senior Analyst and report co-author.

“Asset owners with exposure to gas plants would be advised to consider reallocating capital towards the lower risk and less volatile clean energy sector to avoid value destruction in the event that gas units are forced to close earlier than planned through government policy aimed at aligning power system trajectories with climate targets.”

Stranded assets

Carbon Tracker’s ‘Put Gas on Standby’ report calculates that if gas plants are phased out in line with net zero 2050 targets, nearly US$16 billion of investment in units that are currently profitable could be stranded. In the US $5.8 billion is at risk and US$10.1 billion in Europe, including US$5 billion in Italy and US$3.5 billion in the UK.

The report warned that gas must be phased out to meet climate targets, as it is the largest single source of power sector emissions in Europe, accounting for 34%, and is responsible for 44% of US power sector emissions.

Carbon Tracker said gas has a only limited role in supporting the power system as coal plants close and renewables expand, noting that in both Europe and the US it is already cheaper to generate energy by building new solar and onshore wind capacity than to continue running existing gas plants.

It analysed the financials of 835 operational gas power plants in Europe (189GW, 85% of total capacity) and 2,200 plants in the US (513GW, 97% of capacity).

It discovered that 43GW in the UK and EU, 22% of total and 159GW in the US, 31%, of total is already lossmaking when operating and carbon costs are taken into account. In Germany, 88% of the country’s 23.7GW fleet is unprofitable and it could lose an average US$20 for each megawatt hour of generation this year and next.

The report warns that the economics of gas power are increasingly fragile, and units are highly exposed to volatile gas prices, which are at record levels in Europe. European operators are also exposed to carbon prices via the EU Emissions Trading System, which have risen 10-fold in four years.

US utilities currently plan to build 89 new gas plants with a combined capacity of 28.1 GW in areas of the country where they do not benefit from regulated prices, but the report finds none will be financially viable, putting more than US$24 billion at risk.

In Europe more than two thirds of planned new gas capacity – a total of 23.7GW – will not recoup its initial investment. Nearly US$3.5 billion is at risk in the UK, where there are plans for 20 new units with a combined capacity of 11.4GW.

Call to restructure markets

The report also highlights steadily falling costs for renewables and battery storage. Carbon Tracker claims that, in the US, it is already more expensive to run existing gas generation than to build new onshore wind backed up by a four-hour lithium-ion battery, and by 2025 solar with storage will be cheaper than gas.

By 2023, virtually half of Europe’s operating gas capacity will be more expensive to run than to build new onshore wind or solar with battery storage, rising to more than 85% by 2030.

“Policy makers must consider whether supporting potentially unprofitable gas projects which may undermine efforts to achieve long-term climate targets is the best use for taxpayer funds,” said Sims.

“Renewables, backed by storage, are increasingly able to provide reliable grid services that are not affected by volatile fuel and carbon prices. This offers greater price stability for consumers and business.”

The report calls on governments to restructure capacity markets to reduce support for gas and direct funds to low-carbon technology, and to set end dates for the use of unabated gas in power generation.

It says utilities should recognise the fact that gas plants will have to close early to meet climate targets and consider an orderly wind down of assets to maximise shareholder value. It warns them against pinning their hopes on carbon capture and storage, noting that the technology is costly and pilot schemes have failed to stimulate large-scale deployment.

However, as reported earlier this month in ESG Investor, policymakers are under continuing pressure to take a lenient attitude to the phasing out of gas. Nathan Fabian, Chair of the EU’s Platform on Sustainable Finance (PSF), recently noted that while gas is not an environmentally sustainable source of energy, companies should be allowed to transition to low-carbon business models and be recognised for their efforts without being effectively blacklisted.

The PSF is currently consulting on proposals for a brown taxonomy, delivering its final recommendations to the European Commission this Wednesday. It aims to provide technical screening criteria for sectors and industries not considered wholly environmentally sustainable, yet have the capacity to transition away from causing significant harm.

 

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