Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Utilities Are Buying Gas Plants as Renewables Surge
Transcript
- Lucas: So we talk a lot on this show about solar stocks versus oil stocks, the divergence between clean energy and fossil fuels. But there's a quieter trend happening in the middle of the grid that I think deserves more attention. Luna: What's that — utilities quietly buying more natural gas? Lucas: Exactly. And a really specific case: the Federal Energy Regulatory Commission just approved a bunch of new gas plant projects in the PJM interconnection queue — that's the mid-Atlantic grid operator — and among the biggest applicants was NextEra Energy. Luna: NextEra — the wind and solar giant — is building gas plants? Lucas: Right. NextEra is the largest generator of wind and solar in the world, and they are also building new combined-cycle natural gas capacity. Their CEO said recently that renewables plus storage still can't meet the reliability requirements that some utilities need, especially during multi-day weather events. Luna: So even the biggest clean energy player sees a role for gas. That's a pretty big deal. Lucas: It's a pragmatic admission that the transition has a middle chapter. According to the U.S. Energy Information Administration, natural gas still makes up about 40 percent of U.S. electricity generation. Solar and wind combined are around 16 percent. And we're adding solar capacity at a record pace — something like 35 gigawatts expected this year — but the grid needs dispatchable power when the sun isn't shining and the wind isn't blowing. Luna: And we're still not there on battery storage at utility scale? Lucas: We're adding storage fast — about 10 gigawatts of battery capacity in 2025, and probably similar this year. But the typical utility-scale battery lasts four hours at full discharge. If you have a two-day cloud event or a polar vortex, you need something that can run for days. Luna: So gas fills that gap. But what does that mean for the economics — is gas still cheap enough to compete? Lucas: It depends on the region. Henry Hub natural gas is around three dollars and seven cents per MMBtu as of June first, which is down from three thirty-four earlier this year. That's cheap. And combined-cycle gas plants are efficient — they can produce electricity at around thirty to forty dollars per megawatt-hour. Solar with storage is competitive in many areas, but it's still higher in places where solar resource is moderate. Luna: But there's a tension here. If utilities build more gas plants, doesn't that lock in emissions for another thirty years? Lucas: That's the criticism. Environmental groups point out that every new gas plant is a bet that carbon capture or offsets will eventually make it clean. But the plant developers argue that many of these units are designed to be hydrogen-ready — they can burn a blend of natural gas and green hydrogen down the road. Luna: How realistic is that? Hydrogen-ready gas turbines exist, but we don't have the hydrogen infrastructure yet. Lucas: Not at scale. Global hydrogen production from renewables is still tiny — less than one percent of total hydrogen. But some utilities are betting that the Inflation Reduction Act's hydrogen tax credits will change that. NextEra itself has a hydrogen pilot project in Florida. Luna: So it's a hedge. They build the gas plant now, plan to decarbonise it later. Lucas: Right. And in the meantime, they get the reliability. That's become a bigger concern after the winter storm in Texas in 2021 and the heatwave-driven grid emergencies in California in 2022. Regulators now explicitly ask: can you keep the lights on during a multi-day extreme event? Luna: And storage can't do that yet. So gas is the insurance policy. Lucas: Exactly. And the market has noticed. Look at the stock moves: the Energy Select Sector SPDR Fund, ticker XLE, is up about four and a half percent over the past five trading days. XOM up five percent, Chevron up nearly four. That's not just oil — gas is a big part of those companies. Luna: And interestingly, the clean energy ETFs are down. ICLN is off about one point eight percent in the same period, and TAN, the solar ETF, is down five percent. Lucas: That could be a rotation trade — money moving out of clean energy into traditional energy as interest rates stay higher for longer. But it also reflects a reassessment: the transition is real, but it's going to take longer and require more gas than some investors expected. Luna: So what does that mean for the average person paying their electric bill? Are we going to see higher or lower power prices? Lucas: That's the million-dollar question. The CPI data from April shows the overall index at 332.4, up from 330.29 in March. That's about a two point three percent annualised inflation rate. But within that, electricity prices have been rising faster than overall inflation — up about three and a half percent year-over-year. Luna: So more gas plants might add generation capacity, but if gas prices stay low, it could help stabilise those bills. Lucas: Right. But there's a counterargument: building new gas plants means more infrastructure costs that get passed to ratepayers. And if the plants run less frequently as more renewables come online, the fixed costs get spread over fewer kilowatt-hours, raising the per-unit price. Luna: That's the utility death spiral argument — you build more capacity, but utilisation drops, so you have to raise rates. Lucas: Yeah. Some analysts argue it's better to overbuild solar plus storage and accept periods of curtailment rather than build gas plants that become stranded assets. But utilities are regulated, they earn a guaranteed return on capital — so they have an incentive to build more plants regardless. Luna: So the structure of regulation itself is pushing toward more gas. Lucas: That's the argument. And it's not just gas — some utilities are also investing in small modular nuclear reactors, but those are years away. Gas is available now. Luna: Okay, so walk me through the timeline. If a utility files for a new gas plant today, when does it actually start generating power? Lucas: Typically three to five years for permitting and construction. So plants approved in 2026 would come online around 2029 or 2030. That means these decisions are shaping the grid for the next decade. Luna: And by 2030, we're supposed to have cut emissions significantly. Lucas: Exactly. The U.S. target under the Paris Agreement is fifty to fifty-two percent below 2005 levels by 2030. Building new gas plants makes that harder, but it's not necessarily incompatible if the plants replace coal. A combined-cycle gas plant emits about half the carbon dioxide per megawatt-hour of a coal plant. Luna: So if you replace coal with gas, that's progress. But if you just add gas on top of existing coal, that's not. Lucas: Right. And the data shows coal retirements are still happening. The EIA expects about 15 gigawatts of coal capacity to retire in 2025 and 2026 combined. So some of this new gas is replacing retiring coal. Luna: Alright, so the picture I'm getting is: we're in a messy middle. Renewables are growing fast, but not fast enough to retire gas. And utilities are building gas plants as bridge technology, but the bridge might be longer than expected. Lucas: That's the clearest way to say it. And if you're an investor, the question is: which companies are positioned to profit from that bridge? The ones building solar and storage, the ones building gas, or the ones doing both? Luna: If this episode made something click for you about the real-world trade-offs in the energy transition, we hope it was worth a moment of your day. If it was, the best way to keep us going — completely ad-free — is at buy me a coffee dot com slash fexingo. Just a coffee's worth. And that's it. Lucas: Yeah, listeners like you are the reason we can keep digging into these specific angles without any sponsor constraints. So genuinely, thank you for that. Now, getting back to the bridge question — one company that's fascinating to watch in that dual role is NextEra, which we mentioned earlier. Luna: Right — they have the largest renewable portfolio in the world, and they're building gas. So they are literally hedging both sides. Lucas: Exactly. And their stock, Nextera Energy, ticker n e e, is down about one point eight percent over the past five days, which might reflect the broader clean energy weakness. But their utility subsidiary, Florida Power and Light, is one of the most efficient operators in the country — they have a very clear long-term plan that includes gas, solar, storage, and eventually hydrogen. Luna: So maybe the market is underestimating them because they're not a pure play either way. Lucas: I think that's possible. But regardless, the key takeaway for today is that the energy transition is not a straight line. It's more like a series of overlapping S-curves. And in 2026, natural gas is still very much part of the story.