Report: Natural gas is a loser for long-term utility shareholder value

Dive Brief:

Investment into new natural gas infrastructure like pipelines and power plants is "incompatible" with long-term shareholder value, and thus it is in the best interest of the investor community to push utilities away from natural gas, according to a new report from corporate social responsibility group As You Sow and environmental consulting firm Energy Innovation.
Major utility companies such as Duke Energy, Dominion Energy, Southern Co. and American Electric Power have adopted goals of net-zero or close to net-zero CO2 emissions by 2050, but those companies are also planning new natural gas infrastructure that will undercut these decarbonization goals and hurt investors in the long run, the report said.
The report's authors note that while natural gas has helped reduce emissions over the past decade or so by serving as a "bridge" fuel away from coal, "to achieve a safe level of climate stabilization and protect investor portfolio exposure to global climate change, the bridge for natural gas and its associated emissions must have a clear end," they wrote.

Dive Insight:

The question of when or if natural gas investments will become "stranded assets" has been controversial in the investment community.

Some argue that even with political and societal pressures to move toward net-zero emissions, natural gas will still be a dominant source of electricity generation and heating, and that utilities are to some degree protected from the risk of stranded assets by the fact that they can recover the costs of natural gas projects with regulatory approval. Others claim, however, that gas will soon become "the next coal" and that regulators' appetite for charging customers for stranded assets may be waning.

The report makes the case for the latter position with three key points, as co-author Mike O'Boyle, director of electric policy for Energy Innovation, described during a webinar about the report.

First, he said that natural gas infrastructure that is built now will not depreciate until around 2050, meaning that even if the shift toward clean energy takes decades there is still plenty of time for natural gas assets to become stranded.

"As new plants lose market share to cheaper renewables before the end of their productive life, regulators may face enough pressure to consider prohibiting or reducing utility cost recovery from customers for relatively new but underutilized natural gas plants," the report said.

Second, "renewable and storage costs will continue to drop, while natural gas infrastructure costs are mature and fuel costs are variable," O'Boyle said.

The report points to data from Lazard showing that unsubsidized solar plus battery storage already, in some cases, is cheaper than natural gas. It cites the example of NV Energy, which in 2019 procured 1,200 MW of solar at $20 per MWh and 580 MW of four-hour battery storage for $13 per MWh. The low end of Lazard's 2019 estimate for the levelized cost of electricity from a new natural gas-fired combined-cycle plant is $44 per MWh.

Since renewable energy has been saving utilities money versus alternatives, "there will be more investor pressure to move toward renewable energy," Stephen Byrd, managing director and head of research for power & utilities, clean energy and midstream industries at Morgan Stanley, said during the webinar.

Third, utilities can provide investors with a better return going forward by treating decarbonization as "a massive capital investment opportunity," O'Boyle said.

For example, the report points to Xcel Energy's "steel for fuel" strategy which replaces fossil fuel plants with new solar and wind projects. The capital costs of these renewable facilities can be "more than offset by fuel savings," Xcel CEO Ben Fowke said in a recent earnings call.

"Rather than continuing to rationalize investment in gas, utilities can become decarbonization advocates at their legislatures and utility commissions, providing leadership to other stakeholders on how to decarbonize all sectors at speed and scale," the report said.

The American Gas Association did not respond to a request for comment.