North American power markets: navigating a trickier path to decarbonisation

North America’s energy transition could be longer, more expensive and more politically contentious than previously predicted

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Sam Berman

Principal Analyst, Power & Renewables

Sam has extensive experience in production cost modelling and energy market analysis.

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As part of its commitment to domestic energy production and clean power, the Inflation Reduction Act will continue to guarantee federal tax credits until at least 2050, in our view. While this brings long term federal support, our latest outlook reveals that the decarbonisation of North America is not going to be plain sailing.

Please fill in the form at the top of the page to download an extract from the presentation shared during our recent discussion on this topic, or read on for a summary of some of the key takeaways.

There are several headwinds bottlenecking the potential speed of the energy transition, the most major of which are delays in the process of connecting new forms of energy to the grid, and higher than previously expected long term cost trends for all types of power. Additional prevalence of reliability concerns in energy markets further highlights how difficult it is to transition and keep reliability levels at the historical norm.

These issues represent serious bumps in the road to clean energy, but we do expect emerging policy reforms and innovative new technologies to go some way in mitigating them. In particular, we are seeing ongoing reforms to study processes for interconnection and expect these to help accelerate projects enabling more clean energy delivery to the grid - although the full benefits of these reforms won’t be seen till the late 2020s and early 2030s.

As tech innovations continue, generation costs should come down – however new, untested policies could cause problems. In recent years there has been pressure from several corners, forcing policy changes. Extreme weather, for example, has triggered a raft of new policies to enhance grid reliability, and these come with uncertain risks

Natural gas price will continue to drive all power prices

Gas generation is often the marginal source of electricity. As the final source to be drawn on, it makes up for any shortfall in baseload and renewable energy supplies and generally sets the price for the other forms of power. We expect this price-setting pattern to strengthen further as coal is retired, removing gas’ main competitor. And with the slower decarbonisation we are predicting, gas will stay on the margin for longer. We expect gas market dynamics to continue to guide power prices into the long-term.

Our Henry Hub forecast remains largely unchanged from the previous outlook. We expect additional gas supply from Haynesville to be sufficient to offset both the increase in power burn, and blue hydrogen demand. Prices will increase through the 2020s, as the market expands due to growing LNG exports, but this expansion is likely to slow in the 2030s, when we predict a flat period. However, we expect to see an increasing trajectory for the remainder of the forecast, as global demand is met by higher cost supply. 

Clean generation will continue to grow, but at a slower pace

While we predict a slower deployment of zero-carbon generation, compared to our previous outlook, we do believe that policy reforms will enable future growth. 

A lack of alternatives to gas is a cause for concern. With serious concerns about the economics and logistics of hydrogen-fired generation and carbon capture (CCUS), there are few realistic alternative energy options. Gas generation should hold steady through the early 2040s as coal is retired and demand continues to grow, but we expect to see a gradual decline through the 2050s.

Power, Renewable Energy Credit (REC) and capacity prices all set to increase

On the whole, we expect power prices – in real terms – to be flat through the early 2040s, with gas prices, demand growth and renewable penetration largely offset. 

Despite some flat periods, our outlook predicts power prices to steadily increase in the long-term, as gas prices increase. Renewable Energy Credit (REC) prices will remain higher for longer in this outlook, due to higher renewable costs, but prices are still expected to decline in the long term, as renewable costs will continue to improve. Capacity prices must rise alongside the higher renewable costs - and expected higher costs for long duration storage in this outlook - to ensure system reliability.

Learn more

Please fill in the form at the top of the page to download an extract from the presentation shared during our recent discussion on this topic. 

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