$100B+ in Stranded Gas Assets at Risk

by Bloomberg  Rachel Morison  Monday, April 19, 2021

Is natural gas the new coal?

(Bloomberg) -- Natural gas is falling out of favor with emissions-wary investors and utilities at a quicker pace than coal did, catching some power generators unaware and potentially leaving them stuck with billions of dollars of assets they can’t sell.

Citigroup Inc. and JPMorgan Chase & Co. are among the banks that strengthened their financing restrictions on thermal coal under pressure from shareholders wanting to avoid the fuel, and the expectation is that gas is next. Executives at some western European companies say they’re already struggling to sell gas-fired facilities.

“If you find out somebody who is ready to offer a good price for our gas plants in Spain, then we are ready to sell,” said Jose Ignacio Sanchez Galan, chief executive officer at Iberdrola SA in Spain. “We are not finding people.”

The cost of renewables has dropped dramatically during the past decade, making gas-fired stations less competitive.

Phasing out gas in power generation is just a first step. Cutting back use of the fuel in heating, transport and industry would wreak more potential damage. Europe wants to reach net-zero emissions by 2050, which is at odds with plans to build numerous infrastructure projects, like pipelines and terminals.

If these are built but no longer needed, there’s a potential 87 billion-euro ($104 billion) stranded-asset risk, according to calculations by Global Energy Monitor.

In Italy there are plans to build 14 gigawatts of new gas capacity mostly to replace coal, according to Carbon Tracker Initiative Ltd.

Europe’s biggest utility, Enel SpA, is a global renewables supermajor. Still, about 40% of the company’s 88 gigawatts of installed capacity is made up of coal, oil and gas, but the Italian company is planning to reduce coal generation by 74% in 2022. Although a gas phase-out is also coming down the track, it has plans to build more capacity.

“The important thing is that the direction is clear, it will not change,’’ Salvatore Bernabei, head of global power generation at Enel said in an interview.  “Everyone should understand that we cannot change the world in one day.’’

Quicker Than Coal

Coal has been slow and difficult to phase out in countries where mining provides thousands of jobs. Gas will be quicker because it doesn’t have the same tradition attached, and renewables are now a cost-effective alternative, according to Carbon Tracker.

“Gas will be a repeat of coal but quicker,” said Catharina Hillenbrand von der Neyen, head of company research at the London-based firm. “When we look at power generation, you can see that going really, really quickly.”

This is already happening in Britain, where it’s unlikely any further large-scale gas plants will be built without technologies that cut emissions – such as carbon capture. SSE Plc, which trades on the U.K.’s FTSE 100 Index, said it can’t see a future for new gas stations that don’t incorporate carbon capture or hydrogen.

Electricite de France SA will no longer operate any fossil fuel-fired power generation in Britain after it announced the sale of its last gas-fired power station to private equity firm EIG Global Energy Partners LLC. Historically the involvement of private equity is to squeeze the asset to extract all remaining value.

Investor Pressure

Investors pursuing an ESG agenda will add to the pressure on companies to get out of gas. BlackRock Inc. and Vanguard Group Inc. are among 40-plus investment firms committing to cut the net emissions of their portfolios to zero by 2050.

Portugal’s biggest utility, Energias de Portugal SA, said its strategy is to exit from its two remaining coal plants by 2025, shutting down one and possibly selling the other.

“There is an increasing amount of funds that either don’t like it or can’t even invest in companies with coal,” Miguel Stilwell de Andrade, EDP’s chief executive officer, said in an interview.

“We’re not going to wait until people tell us that gas is no longer going to be used. We’re going to make sure that we’re going to get out of there before.”

There’s no point building assets now that will be of no use in a few years, said Frans Timmermans, the European Commission’s executive vice-president. Europe can skip the transition and go straight to clean assets by spending on the right projects now, he said.

“We need to make the investments to create sustainable societies,” he said. “That capital, not spent well, will create stranded assets very soon, and we will put unbearable financial burden on the shoulders of our children.”

U.S. Transition

In the U.S., progress likely will be slower since there’s no federal mandate for a transition from fossil fuels to renewable power. Gas is superabundant and cheap, thanks to the country’s fracking boom, which has helped hasten the demise of coal.

By 2016, gas was the country’s dominant power source.

"Everyone is talking about it in terms of a transition, not a cliff,” said Ryan Wobbrock, a senior credit officer at Moody's Investors Service. “At this point, it would be very difficult to completely disentangle that system.’’

But now there are indications that demand in the U.S. is topping out decades ahead of schedule with cheaper renewables and net zero moving up the agenda for utilities. Renewables could become the leading power sources on U.S. grids by 2028, Morgan Stanley said  last year.

President Joe Biden’s $2.25 trillion infrastructure and energy plan includes incentives for renewables and a massive transmission grid build out that could speed up the transition away from fossil fuels.

Progress on carbon capture technology could throw a lifeline to gas, meaning that stations could serve as backup when there’s a dearth of sun, wind or hydropower. Some energy companies are focusing on making sure that gas can keep operating, rather than ridding their portfolios of the fuels.

“Getting the flexibility to deal with the variability in renewables production is really, really difficult if you don’t have any gas-fired generation,” said Benjamin Collie, a principal for commissioned projects at Aurora Energy Research Ltd. in Oxford.

European Gas demand is still expected to grow by 3% this year, according to the International Energy Agency.

At least in the short term. The European Investment Bank, for one, will end all financing for fossil fuels in December.

“To put it mildly, gas is over,” EIB President Werner Hoyer said during a January press conference. “Without the end to the use of unabated fossil fuels, we will not be able to reach the climate targets.’’

© 2021 Bloomberg L.P.