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New Report Highlights Key Role Of Natural Gas In Electric Power Sector

Natural gas will continue to be an important driver of electric reliability and cost in the U.S. and the nexus between the electric and natural gas industries will continue to be critical for the foreseeable future, a new report prepared for the American Public Power Association (APPA) states.

The report, released on June 24, was prepared for APPA by GDS Associates Inc., an energy industry consulting firm.

The report covers a wide range of topics including an overview of the natural gas industry, the electric and natural gas nexus and pipeline infrastructure needs.

With respect to the nexus between the electric sector and natural gas, the report notes that 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 report said.

It noted that 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 and a redefinition of how the natural gas pipeline network was utilized and expanded.”

Higher and higher intermittent generation penetration and the uncertainty and variability of electric output from these sources “make quick-starting natural gas generation a critical reliability component on the grid,” the report said.

Natural gas-fired electric generation will remain critical to maintaining reliable electric service for the foreseeable future, according to the report.

It points out that 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 remains an important fuel for generating plants owned by public power utilities to serve the customers in their communities. According to analyses by APPA, natural gas-fueled power plants accounted for 44.1% of generating capacity owned by public power utilities as of 2020, and 34.4% of the energy generated by public power-owned facilities, the report noted.

It said that the importance of natural gas-fueled generation to reliable electric service “creates significant interdependencies between the electric and natural gas industries. These interdependencies have been areas of particular focus for years, often highlighted by severe winter weather events when peak electricity and natural gas usage coincide.”

Impact Of Natural Gas Prices On The Cost Of Power

Meanwhile, the report notes that there is a well-established connection between wholesale natural gas and power prices.

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 natural gas electric generation has grown and played a large part in replacing coal generation, the U.S. electric system is more heavily impacted by the price of natural gas. “Coal continues to compete with natural gas resources – and is relatively advantaged because of the recent increase in natural gas prices – but large amounts of coal generation have retired so its role as a substitute for natural gas fuel has diminished,” the report pointed out.

Renewables can also compete and substitute for natural gas generation, but their variable output means that natural gas generation also serves a complementary role with renewables. “Both coal and renewables have been challenged with supply chain disruptions which also reduce their capability to compete with natural gas.” 

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,” the report said.

Among the report’s key conclusions was that “[w]ithout adequate natural gas supply and the pipeline infrastructure to transport it, natural gas, power, and home heating customers are likely to experience elevated energy prices.”

Regulation and Pipeline Infrastructure

As for regulation and natural gas pipeline infrastructure, the report notes that as the lead regulator with authority to approve new interstate natural gas pipeline facilities, the Federal Energy Regulatory Commission (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 report said.

In 2018, FERC began exploring whether it should revise its gas pipeline certification policy statement that was originally issued in 1999. More recently, FERC in March 2022 voted to seek additional comments on two policy statements it issued in February that provide guidance regarding the certification of interstate natural gas pipelines and consideration of greenhouse gas emissions in natural gas project reviews. 

“As the need for natural gas to address critical needs persists, including ensuring electric reliability, regulatory processes for review and approval of gas pipeline infrastructure must be efficient and provide regulatory certainty and predictability to applicants and other stakeholders,” the report states.

“Efficiency is achieved by having decision processes that are as streamlined and expeditious as possible, given statutory requirements, to provide reasonable outcomes while avoiding unnecessary delays or effort. Certainty is achieved with concrete and clear approval requirements. There should be a clear path to approval if required conditions are met. Efficiency and certainty are critical pillars of regulatory approval processes that should harmonize with the extent of statutory requirements of review.”

FERC’s goal to have legally durable pipeline approvals “is entirely consistent with the need for regulatory certainty and efficiency. A regulatory approval process can and should meet statutory requirements (avoiding judicial reversals) while also providing efficiency and certainty for applicants.”

At the same time, the report said that if regulatory approval processes are inefficient or create uncertainty, then needed infrastructure investment can be adversely affected.