The Importance of Natural Gas Fuel & Interstate Pipeline Infrastructure

The electric and natural gas industries are intertwined, and several recent events including natural gas pipeline review changes contemplated by the Federal Energy Regulatory Commission (FERC), a rapid increase in natural gas commodity prices, and extreme winter weather events have brought a focus to the relationship between those industries. In the last 15 years, the intersection between the electric and natural gas industries has expanded and intensified. Natural gas has grown significantly as an electric generation fuel source in that time, both as a replacement for retiring coal and as flexible generation, balancing growing intermittent resources like wind and solar. The prominence of natural gas-fueled generation has been propelled by the shale gas revolution, which significantly increased domestic natural gas production, resulting in sustained low prices for several years (see Figure 1) and a redefinition of how the natural gas pipeline network was utilized and expanded. Higher and higher intermittent generation penetration and the uncertainty / variability of electric output from these sources make quick-starting natural gas generation a critical reliability component on the grid. 

Although other technologies, such as renewables and batteries, continue to proliferate, new technologies may emerge, and environmental policy continues to evolve, natural gas-fired electric generation will remain critical to maintaining reliable electric service for the foreseeable future. Indeed, the U.S. Energy Information Administration (EIA) projects that natural gas resources will remain relatively constant as approximately one-third of the generation capacity mix through 2050, with some regions likely at a higher percentage.

Natural gas power plants provide several valuable attributes to the electric grid that help maintain its reliability. One of those attributes is flexibility, meaning the ability to vary output rapidly (including stopping and starting) as needed. Natural gas power plants, across the relevant technologies (e.g., combustion turbine, engines, combined cycles) and especially newer plants, are typically highly flexible. From peaking plants that can be started very rapidly as needed, to other natural gas plants that can vary their output quickly, natural gas power plants can respond to the dynamic needs of the electric grid. For example, in the California Independent System Operator (CAISO) footprint, natural gas has been significant as a complement to increased output from solar resources (see Figure 2). The flexibility of natural gas power plants has been utilized to ramp down generation during the midday solar production period and then quickly ramp back up in the evening as solar output diminishes while load requirements are high.

Given their prevalence and critical role that natural gas power plants play in providing reliable generation to the grid, the price of fuel for these plants can significantly impact the price of electricity ultimately paid by consumers. There is a strong, well-established connection between wholesale natural gas and power prices. In the FERC-regulated organized markets, the relationship between natural gas prices and wholesale electric prices is particularly evident. Because natural gas power plants are often on the margin, they frequently set the price in structured wholesale electricity markets, where the cleared offer price of the marginal unit sets the overall market price.

Since the effective deregulation of natural gas commodity prices in the 1990s, natural gas prices have been the product of supply and demand market factors. This can leave electric utilities and their customers exposed to significantly increased costs for essential natural gas fuel when supply constraints and / or other factors lead to higher natural gas prices, as has been the case in 2022. The recent increase in natural gas prices has been attributed to reduced exploration due to the COVID pandemic and environmental policy, fallout of the February 2021 arctic weather event, increased difficulty financing exploration, and increased liquefied natural gas (LNG) export activity, among other factors.

Indeed, over the past seven years, the amount of LNG exports from the U.S. has consistently risen and is expected to continue to rise. This trend has only been accelerated and intensified due to the war in Ukraine, and domestic users of natural gas are increasingly competing with global users. As demand increases, new supply is often tracked using rig count as an indicator of exploration and development. Although the number of rigs has been steadily increasing since a sharp slump that occurred in 2020, it has still not returned to 2019 levels. The importance of natural gas to reliable and affordable electric service highlights the need to ensure an adequate and reliable natural gas supply chain, including sufficient natural gas transportation infrastructure.

As the lead regulator with authority to approve new interstate natural gas pipeline facilities, FERC plays a significant role in ensuring adequate infrastructure exists to meet demand for natural gas, including that for electricity generation. In the past few years, FERC has been undertaking an overhaul of its processes for reviewing new pipeline applications, with potentially significant implications for natural gas supply and price reliability. The ongoing need for natural gas supply will continue to place demands on transportation infrastructure. Figure 3 shows that summer 2022 demand is expected to surpass recent history (driven by electric generation and exports), after January 2022 recorded the highest ever use of natural gas for electric generation.

A reliable and affordable supply of natural gas depends on adequate transportation infrastructure. NERC has asserted that “additional pipeline infrastructure is needed to reliably serve load.”5 FERC is reporting 13,353 MMcf/d of major pipeline projects pending as of June 1, 2022.

EIA highlighted the affordability concerns associated with inadequate gas pipeline capacity by specifically studying a scenario assuming no interstate pipeline expansion as a part of its 2022 Annual Energy Outlook (AEO). As compared to its ‘Reference Case,’ EIA noted several changes in the no pipeline addition case by mid-century including approximately 2 Tcf less gas production and 11% higher wholesale natural gas prices (see Figure 4).

Natural gas is and will continue to be an important driver of electric reliability and cost. The nexus between the electric and natural gas industries has intensified and will continue to be critical for the foreseeable future. The availability of adequate natural gas supply and the infrastructure to deliver it will impact the electric sector, including public power, as U.S. policy develops and changes. As an element of that policy, regulatory review of necessary energy investment should harmonize legally robust decisions with concrete approval conditions and streamlined processes. Otherwise, the reliability and affordability of the mutually dependent natural gas and electric systems will be harmed. The table below repeats the key points of this article and to read the full article please visit the American Public Power Association website HERE.

For more information or to comment on this article, please contact:
Matt King, Senior Project Manager
GDS Associates, Inc. - Marietta, GA
770-799-2401 or
matt.king@gdsassociates.com

References
 ¹ Energy Information Administration, Today in Energy, https://www.eia.gov/todayinenergy/detail.php?id=38372
 ² Energy Information Administration, Today in Energy, https://www.eia.gov/todayinenergy/detail.php?id=46236
³ FERC 2022 Summer Energy Market and Reliability Assessment Presentation
⁴ Energy Information Administration, Natural Gas Weekly,
https://www.eia.gov/naturalgas/weekly/archivenew_ngwu/2022/05_12/
 ⁵ Id. at v
 ⁶ https://cms.ferc.gov/industries-data/natural-gas/major-pipeline-projects-pending
 ⁷ Energy Information Administration Exploration of the no Interstate Natural Gas Pipeline Builds case, https://www.eia.gov/outlooks/aeo/IIF_pipeline/pdf/AEO2022_IIF_pipelines.pdf