As electricity demand continues to rise globally [1], decarbonizing the power sector is crucial for achieving carbon neutrality. This requires accelerating the expansion of sustainable power supply that is already underway to actually replace fossil fuels, rather than currently being added to them for energy supply. From this perspective, the financing of new gas-fired power plants (gas plants) should be excluded, as it would hinder the energy transition and climate objectives.
Gas is not a “transition” energy source, even as a replacement for coal
According to the International Energy Agency (IEA), electricity generation must reach net-zero emissions by 2035 in “advanced economies” (OECD and European countries) and globally by 2040 and supply nearly half of total energy consumption [2].
While fossil gas combustion emits roughly half the CO2 of that of coal [3], gas – primarily composed of methane – has a far greater impact from extraction to transportation. Methane leaks throughout the supply chain, and this greenhouse gas has a warming potential 83 times greater than CO2 over 20 years [4], contributing to about 30% of global temperature increases since the Industrial Revolution. As the IEA underlines that cutting methane emissions is crucial [5], building new gas plants to replace coal is not a viable solution to decarbonize the power sector.
Demand for fossil gas is already declining
In all IEA scenarios, including the Stated Policies scenario (STEPS), the peak demand for fossil gas, including for electricity production, is expected before 2030 [6]. This is especially the case in advanced economies where demand is already decreasing [7]. Hence, building new gas plants, whose lifespan ranges from 25 to 40 years, is incoherent with this trend.
Outside OECD countries, the slight increase in gas consumption observed in some regions is unlikely to significantly boost global demand, e.g. in Asian countries [8], due to the low competitiveness of gas compared to renewables. It is preferable for these countries to develop electricity production independent of gas imports, which are volatile and often uncompetitive. Pakistan’s recent backtracking on its gas importation plans is a significant illustration [9].
Future conversion of gas plants is unrealistic
Building new gas plants is sometimes justified by a hypothetical future conversion to use alternative fuels like hydrogen, biogas, and biomethane, or by the addition of carbon capture (CCUS) to reduce the plant’s emissions.
Yet, the huge gap between the volume of fossil gas consumption and the volumes of alternative fuels available [10], and CCUS constantly failing to live up to its promises, makes these conversions highly unrealistic. This is even more the case given that projected volumes for alternative fuels and emissions reductions through CCUS are continually revised downwards with each NZE update.
In particular, the so-called “hydrogen-readiness” is more myth than reality, as it requires massive additional investment to provide very limited climate gain. It is also important to note that the supply chain for hydrogen in replacement of fossil gas is currently virtually nonexistent and hydrogen is – and will remain – very expensive to produce [11]. It is very unlikely that such plants would be capable of competing with already mature sustainable options, such as wind and solar.
Priority should be the acceleration of sustainable power supply
The IEA’s projected reduction in fossil gas demand is largely due to the accelerating deployment of renewables – which will meet 95% of the growth in electricity demand [12] -, efficiency gains, and the electrification of end-uses. In that context, and according to multiple IEA models, the role of thermal power plants will essentially be to provide seasonal flexibility and the current stock of legacy thermal capacity is sufficient [13].
The long-term economics of gas plants, compared to sustainable energy sources, are rapidly changing. In many cases, including in Europe and parts of the United States, battery operators are already supplying backup power to grids at prices competitive with gas plants [14]. The way forward relies on a massive increase of new solar and wind capacities already being deployed [15], paired with mature batteries and interconnections for flexibility.
Banks’ climate strategies are still short of power sector policies
The proliferation of decarbonization targets for the power generation sector amongst global banks shows that they recognize the importance of a dedicated approach to this sector [16]. The main issue remains that banks do not detail whether and how these targets influence their financial support to the power sector, and actually contribute to its decarbonisation.
Power policies, framing the reorientation of their financing to the power sector in coherence with a credible net-zero trajectory, should be at the core of banks’ climate strategies. This requires that they stop financing the development of new gas power plants and massively increase their support to sustainable power supply – mainly wind, solar, power grids and storage. So far, amongst the top global 60 banks assessed in the Sustainable Power Policy Tracker, none have published such a policy. And even among those that already took a first step, such as BNP Paribas, there is still a lot more to be done to achieve robust commitments.
The transition to an energy system based on sustainable power supply is underway, and banks should drive this effort. Power sector decarbonization targets alone are insufficient to align with a “net-zero” trajectory; banks should urgently adopt specific policies targeting financing activities for the power sector. A robust power policy should demonstrate how the bank intends to transform its financial support to the sector. This means at least including measures to stop direct and indirect financing to new gas plants [17], and set targets for financing sustainable alternatives. These commitments should translate into committing to a robust energy supply financing ratio of 6:1 by 2030.
