Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / How Utilities Are Overbuilding Gas Plants Beyond Reliability
Transcript
- Lucas: Luna, I want to talk about something that sounds contradictory but is actually happening right now. Utilities are building new natural gas plants — a lot of them — even as renewable capacity hits record highs. Luna: Yeah, I've seen that. It feels like everyone's talking about solar and wind, but then you look at the actual construction data and gas is still huge. What's driving it? Lucas: So the headline reason is reliability. Grid operators say they need gas plants for when the sun isn't shining and the wind isn't blowing. But the scale is surprising. The Energy Information Administration estimates that about 20 gigawatts of new gas capacity will come online in the U.S. this year. That's up from about 12 gigawatts in 2024. Luna: That's a big jump. But is it really just about reliability, or is there something else going on? Because battery storage has been getting cheaper — you'd think that would eat into some of that demand. Lucas: Battery storage is growing fast, no doubt. But it still only covers a few hours of dispatch. A gas plant can run for days if needed. And then there's the data center boom — those facilities need power 24/7, and utilities are locking in long-term contracts. Luna: Right, I've heard that Amazon and Google are basically begging for power. But aren't they also signing deals for renewables? I thought they were big buyers of solar. Lucas: They are, but the renewables they buy are often backed by gas plants behind the scenes. Here's the specific number: NextEra Energy, which is the biggest renewable developer in the world, also added more gas capacity last year than any other U.S. utility. Their CEO said they see gas as a bridge fuel for at least another decade. Luna: So even the renewable champion is building gas. That's the kind of detail that makes you question the whole narrative. Lucas: Exactly. And I want to zoom in on one case: Duke Energy in the Carolinas. They got approval to build a 1.6-gigawatt gas plant in 2023, citing reliability needs. But now, internal documents show they're planning to run it at a 70 percent capacity factor — that's way above what you'd need just for peaking. It's essentially baseload. Luna: So it's not a backup plant, it's a primary plant. And that means they're betting gas demand stays high for a long time. Doesn't that clash with their own net-zero goals? Lucas: It does. Duke has a target of net-zero by 2050. But they argue that retiring coal plants faster — which they are doing — requires gas as a replacement. Coal is down to about 16 percent of U.S. generation, from 50 percent a decade ago. Gas fills that gap. Luna: Let's talk about the economics. Natural gas prices have been volatile. Henry Hub is around $3.36 per million Btu right now, down from $3.07 in early June. But that's still low historically. Does that make new gas plants look cheap on paper? Lucas: Yes, absolutely. When gas is under $4, a combined-cycle gas plant can produce power for about 2 to 3 cents per kilowatt-hour, which is competitive with wind and solar once you add storage. But the risk is that gas prices could spike again — like they did in 2022 when Henry Hub hit $9. Luna: If today's episode helped you understand why utilities are still building gas plants — even with renewables booming — maybe it's worth knowing that shows like this stay ad-free because of listener support. You can find that at buy me a coffee dot com slash fexingo. Lucas: Yeah, and we really appreciate that. It lets us keep digging into these specific cases without worrying about ad revenue. So anyway — back to the plant economics. Luna: So are these utilities just hedging their bets? They build renewables, but they also lock in gas capacity. It's like they want to win either way. Lucas: That's a good way to put it. And there's another angle: the gas plants themselves are becoming more efficient. New turbines from GE and Mitsubishi can reach 64 percent efficiency, compared to 55 percent for older models. So even if gas prices rise, these plants burn less fuel per megawatt. Luna: So it's not just about building more gas, it's about building better gas. That makes the economics more durable. But what about the climate math? Even efficient gas still emits CO2. Lucas: Right. And that's where the tension lives. For every new gas plant, you're locking in emissions for 30 to 40 years. Some utilities are trying to offset that by blending hydrogen into the fuel mix. But green hydrogen is still expensive — like $4 to $7 per kilogram, compared to natural gas at less than $1 per kg equivalent. Luna: So it's a token gesture for now. Let's zoom out. We're recording this on June 5th, 2026. WTI crude is around $93 a barrel, Brent near $95. Oil has been volatile but gas has been relatively calm. Does the oil price environment affect utilities' gas decisions at all? Lucas: Indirectly, yes. Oil prices affect the cost of diesel for backup generators, but for grid-scale power, it's all about gas and coal. However, high oil prices can push more drilling activity, which increases associated gas supply and keeps prices lower. So there's a link, but it's not direct. Luna: Got it. So utilities are really focused on gas supply and demand within North America. And right now, the Permian Basin is producing so much associated gas that it's depressing prices even as LNG exports grow. Lucas: Exactly. U.S. natural gas production hit 103 billion cubic feet per day in March, a record. And with new LNG terminals coming online — like Plaquemines in Louisiana — demand is rising, but supply is keeping pace. So gas looks cheap for the foreseeable future. Luna: But that could change quickly if there's a harsh winter. Remember February 2021 in Texas? Gas prices spiked to $200 per MMBtu in some spots. Lucas: Right, that was an extreme event. But it actually reinforced the case for gas plants — because when renewables froze, gas was the only thing that could ramp up. So utilities say, look, we need gas for reliability, and the market is giving us cheap gas, so we'll build. Luna: It's a self-fulfilling prophecy. Build gas because it's cheap, keep it cheap by building more. But what does that mean for the energy transition? Are we just expanding the grid with more fossil fuel capacity? Lucas: The net effect is that total electricity generation is growing faster than renewable capacity can replace fossil fuels. Data centers alone could add 35 gigawatts of demand by 2030. So the grid is getting bigger, not just cleaner. And that means gas plants are going to be part of it for a while. Luna: One concrete example: a utility in the Midwest recently filed a plan to build a 1,000-megawatt gas plant, and they said it would run at a 90 percent capacity factor. That's essentially a baseload coal plant replacement, but with gas. Lucas: Do you remember which utility that was? I want to look it up. Luna: I think it was American Electric Power, for a plant in Indiana. They said it would support renewable integration, but the numbers suggest it's running almost all the time. Lucas: That's a pattern. And it makes me wonder: if these plants run at high utilization, they become the new baseload, and that could crowd out investment in long-duration storage or advanced nuclear. The grid gets locked into gas. Luna: So the question becomes: are we overbuilding gas plants beyond what's needed for reliability? And who's watching that? Lucas: State regulators approve these plants based on integrated resource plans, but those plans often rely on optimistic assumptions about gas prices and demand growth. Environmental groups are challenging them in places like North Carolina and Minnesota, arguing that they don't fully account for carbon costs. Luna: And what about the investors? If you own shares of a utility that builds a gas plant, you're essentially betting on gas demand for decades. But if carbon regulations tighten, that asset could become stranded. Lucas: That's why some utilities are structuring their gas plants as 'hydrogen-ready' — meaning they can burn a mix of hydrogen and gas later. But again, that's a promise, not a guarantee. And for now, the economics favor gas. Luna: So the bottom line is: utilities are building gas plants because it's cheap, reliable, and they can point to data center demand as the driver. But the net effect is a slower transition than the headlines suggest. Lucas: Right. And that's the kind of nuance that gets lost in the either-or debate about renewables versus fossil fuels. The reality is a messy mix. And the numbers — from Henry Hub at $3.36 to the 20 gigawatts of new gas capacity — tell you that the mix is shifting, but not as fast as some hope. Luna: Well, Lucas, I think we've drilled down pretty deep. For listeners who want to keep their finger on the pulse of energy economics, we'll be back soon with more. Lucas: Absolutely. Thanks for the conversation, Luna.