El Niño kept winter temperatures warmer than normal, so at the end of March 2016, the U.S. natural gas inventory was 2.5 Tcf, or 67% above 2015 levels and 53% above the five-year average. There's now nearly 3 Tcf in gas storage, and it's going to take a hot summer and cold winter to bring down inventories.
Going forward, there are three baseload gas demand markets: gas for power, gas for industry, and gas for export. But, it's the first one, gas-based electricity, that could be the biggest factor on rising incremental U.S. gas demand. In 2015, the U.S. used nearly 27 Bcf/day to generate gas electricity, a 20% increase from 2014. Gas is projected to pass coal this year and become our primary source of electricity. First quarter this year, a time when gas reliance is usually lower, gas provided 32% of U.S. power; coal provided 29%.
It's critical to note that gas is projected to add more to actual U.S. generation than it will to capacity, a testament to its higher reliability than wind or solar, the only other two sources of power expected to increase. And let's be clear: there's a lower costs and reliability-driven rush to new gas-fired power over renewables, even in EPA's model California.
U.S. Gas Power Market, Today And Tomorrow
Sources: EIA; JTC
Sustained low natural gas prices and more environmental regulations are driving more gas electricity. Gas units are usually the first ones deployed to match higher summer demand. This will be even more true in the hotter years ahead as gas gains power market share.
"According to the recent National Climate Assessment, annual average temperatures in the U.S. could rise another 10°F by century’s end." Nearly 90% of America's 120 million households or so have air conditioning (here), and it's closer to 100% for huge gas users like Florida and Texas.
This summer is expected to be very hot, especially in the central and northeastern U.S. Gas prices are up 20% since late May, and July gas futures are now up over $2.60 per million Btu, the highest since end of September. Cooling demand could have power sector burn averaging over 36 Bcf/day in July, compared to current levels of 27 Bcf/day and 34 Bcf/day last July.
Overall, "Prepare for another scorching summer in the U.S." to help increase gas power demand this year by 5-7%. A long hot summer would firm a bullish position for gas going into the winter heating season, where over 50% of homes heat with gas.
NOAA reports a 75% chance that La Niña will be in place by the Fall, bringing colder winter temperatures and more gas demand in the residential sector for heating. And since electricity is quietly gaining market share in heating over natural gas, the penetration of gas into our power portfolio will keep gas' importance during winter (note: the "Polar Vortex" of 2014 upped residential gas demand 20% over the winter months in 2013).
"In particular, MATS compliance has forced power producers to take a hard look at the older, less efficient coal plants in their fleets to determine whether adding emissions control equipment is an economical way to bring those plants into compliance, or whether...shutting them down" in favor of highly efficient natural gas combined cycle plants makes more sense (here).
EIA has U.S. coal production falling 25% from 2014-2016, making gas even more attractive. At nearly 14,000 megawatts, "coal made up more than 80% of retired electricity generating capacity in 2015." These retirements are the equivalent of adding 1-2 Bcf/day in new gas power demand, and switching could reach an additional 5 Bcf/day by 2020.
The 10,000 megawatts of new coal retirements for 2016-2017 (here) are particularly bullish for gas because most of them will occur in Pennsylvania, where Marcellus shale means cheap, local gas is abundant. And there's lots of room to grow: despite producing 18% of U.S. gas, Pennsylvania accounts for just 4% of gas used for power. In March, gas prices for power in Pennsylvania were just $1.43, 40% below the national average. Gas is still just 30% of Pennsylvania's electricity, below the national average.
Texas though is the main U.S. power market for gas, using 4.7 Bcf/day. From 2010-2015, while gas production increased 18%, Texas upped its gas power generation 30% to 240 billion kWh. Gas is especially important as peaking capacity to augment the load variations in intermittent resources like wind.
Since 2010, Texas has surged its wind capacity 80% to 18,000 megawatts, and is the clear leader in wind power, at 45-50 billion kWh a year. For many years, the planners on Texas' ERCOT grid have assumed that wind projects would provide less than 10% of their nameplate capacity. Thus, Industrial Info is tracking 27 peaking gas generation projects in Texas, valued at over $9.3 billion (here).
Environmental rules will also increase the $2.50 per million Btu gas price threshold, which is the generally acknowledged level at which Powder River Basin coal, an area that produces 40% of all U.S. coal, becomes competitive with natural gas. BTU Analytics highlights key markets for coal-to-gas switching in 2016:
- "Some Southeast states source expensive Appalachian coal and have the advantage of few pipeline constraints making them an ideal location to switch to gas volumes.
- With a clear price advantage of gas over coal in the Northeast we would expect to see increased gas flows to power plants in that region.
- In the Midwest...economic dispatch and ample spare capacity allows for easy switching."
In the near-term, gas fleets can increase utilization by ramping up idle capacity to displace other sources. In 2015, the capacity factor of the U.S. natural gas combined-cycle fleet averaged 56% (for reference, a 100% rating indicates that the fleet is operating all the time at maximum possible output).
EPA's "Clean Power Plan" (Building Block #2) wants states to increase the average utilization of gas power plants to 75% (here). With this potentially adding over 9 Bcf/day of gas burn, it's no wonder then that EIA puts our new pipeline capacity needs at 40 Bcf/day by 2030: The U.S. Department of Energy has been very clear: the rationale for developing additional gas pipeline capacity isn't debatable.
U.S. Gas Power Demand Markets Rising
Sources: EIA; JTC
U.S. Gas Power Spikes in the Summer
Sources: EIA; JTC
Compared to 2015, the price of gas to generate electricity this year is expected to fall 15% to $2.
Even the huge wind and solar capacity build-out means more gas because gas is the needed backup for their intermittency. Despite mandates and tens of billions of dollars installing more renewables, "Why California Is A Natural Gas State."
Even if the legal uncertainties of CPP don't clear up, the rise of gas seems unstoppable. EIA reports that U.S. gas consumption will be 4.7 Bcf/day higher in 2020 if the CPP is implemented. Even under CPP compliance, some might find it astonishing that there's no projected increase in nuclear for either capacity or generation in the years ahead. It's easy to see why: "One-Third Of US Nuclear Reactors Are Near Mandatory Retirement."
And with natural intermittency typically meaning that grand plans and high forecasts for more wind and solar power don't actually come to pass, and state efficiency and environmental rules unrelated to CPP already favoring gas, the "call on gas" for U.S. electricity could be even more enormous. This is exactly why the potential for new methane rules, Pennsylvania Governor Wolf's high tax proposal on shale, and governments blocking pipelines to hamper production is a national concern.
From 2016-2018, nearly 19,000 megawatts of new gas capacity is expected to come online, centered around our shale plays. Longer-term, EIA has "strong growth in wind and solar generation spurred by tax credits" leading to a short-term decline in gas power through 2020, but "gas generation then grows significantly under a mass-based CPP implementation," increasing by around 2% per year.
Yet, even these huge projected gains for gas power are likely understated. Natural gas has already proven its ability to quickly outpace the forecasts of EIA's National Energy Modeling System. In 2010, EIA had gas generating just 690 billion kWh in 2015, when in reality, gas generated nearly double that, 1,335 billion kWh.
EIA: U.S. Gas Power Surge in 2020s
Sources: EIA, IEO 2016; JTC
U.S. Gas Demand For Power...Likely Higher Than EIA Projects
Sources: EIA; JTC
