Tuesday, August 16, 2011

Natural Gas Doubles Electricity Market Share: Why?

This year natural gas power plants will provide 24.5% of all electricity generated, a doubling of their 12% market share in 1990, according to Energy Information Administration data.  EIA projects gas reaches 25% in 2012 and is likely to keep rising.

From 1990 to 2003, the electricity market share of gas rose from 12% to 16.7% or by about 40%.  From 2003 to 2011, natural gas jumped from 16.7% to 24.5% or about 45%.  Natural gas gains seem steady, unstoppable.

Why is natural gas like a Pac Man eating electricity generation market share?  The capital costs of natural gas power plants are lower--much lower--than any of the main alternatives--coal, nuclear, wind.  They are cheaper to build than anything else.  This is the main competitive advantage of gas, but there are more.

Natural gas power plants face lower development risks and are easier to build than certainly coal or nuclear plants, because they generally face much less local or national opposition in the siting and permitting processes.  They do so, because natural gas power plants emit little pollution--no mercury, arsenic, lead.  Natural gas power plants meet the proposed EPA Air Toxic Rule for example.

Natural gas power plants--the air cooled models especially--require much less water than a coal or nuclear plant.  In many parts of the country, water is becoming a scarce resource, as a result of population pressures and a changed climate and so the fact that natural gas power plants sip and do not guzzle water is a major advantage.

Natural gas power plants do not have a dangerous, expensive waste stream to manage, as nuclear plants do.  Yet coal plants also have a waste problem, producing large amounts of coal ash that must be safely stored, but sometimes is not, with dire results for water quality and human safety.

Natural gas plants also are flexible and can be designed to run as baseload, intermediate, or peaking plants.  Natural gas plants can quickly power up or down, making them ideal to provide back up power and to match with wind.  Coal and nuclear plants cannot perform this function.

Natural gas power plants also use fuel efficiently and can be very efficient if they capture and use waste heat.  In competitive power markets, where plants do not recover from captive, monopoly ratepayers fuel costs, the fuel efficiency of a plant is a key factor.

The key weakness of natural gas power plants has been both the volatility of natural gas pricing and periods of high natural gas prices that made them uneconomic to run in competitive electricity markets, during many hours of the year, when electricity market prices were low or average.

The shale gas boom that began in 2000 and took off in 2007 has driven natural gas prices below $5, while coal prices have increased.  Shale gas means that natural gas is now often lower cost than coal, and plants that can run on either coal or gas burn gas.

All these strengths will drive up further the market share of natural gas power plants.  It almost certainly will reach 33% within a decade and likely go higher, much higher, over time.


  1. All of your comments championing natural gas for power generation seem to ignore some inconvenient uncertainties in the market place.
    For example, as the shale industry evolves through M&A, how will price change?
    I would expect M&As to improve operation efficiency and reduce costs, which would be a win-win for industry and the public; however, the costs of inputs and drilling equipment are rising right now, not falling.

    There is a glut of gas right now; will producers continue to drill to ramp up supply when they can make more money by not drilling or by moving to liquids-rich plays? Will it be possible to drill enough wells and build enough infrastructure to reach the projected levels of production? Some people don't think so.

    It all looks good on paper, but unless you have a crystal ball, I would argue that diversified generation portfolios are key to maintaining flexibility and the lowest rates possible in the face of economic and environmental uncertainty.

    I'm all for a cleaner environment, but I am also weary of any over-dependence on a single fuel.

  2. You are right that there are uncertainities and too much reliance on any one fuel is a bad idea or fuel diversity is a good idea.

    But the growth of gas is consistent--at least for 10 years--with increasing fuel diversity.

    Coal was at 50.8% of market share in 2003. A lot of eggs were in the coal basket. We are heading to an electric generation market where coal and gas will be equal shares around 33%. With then all sorts of renewables--hydro, wind, solar, biomass, geothermal--at about 20%. And with nuclear at about 15%. That mix would be more diverse than the time when coal was dominant.

    Of course, I also think over the next 25 years gas and renewables will continue to grow, while coal shrinks and nuclear struggles to hold a 15% market share. At that point, we would be putting a lot of eggs in the gas and renewables baskets.

    Could gas go off the tracks? Yes. Are the odds high that it will? No. Gas has been gaining market share for 30 years and shows no sign of not continuing to do so. The shale gas revolution is real. There is a huge amount of shale gas that can be produced for $6 per thousand cubic feet. Gas plants with their other large advantages will remain very competitive and attractive with gas at $6.

    There are uncerta

  3. Concerned ScientistAugust 16, 2011 at 9:21 AM

    Thanks for this John

    From an environmental perspective, this is excellent news and this story should be on the front page of all major newspapers. We will cut air pollution significantly and also cut greenhouse gas emissions by at least half. Coal is far worse for surface and groundwater pollution than gas.

    Although you wouldn't know it from the way their citizens rail against shale gas, large eastern cities like Philadelphia and NYC benefit enormously from lower gas prices. The citizens of NYC alone probably saved $2 billion last year over years previous due to lower gas prices. At a time when other energy costs are up and the economy seems to be teetering on the brink of another collapse, this has got to be welcome news.

  4. Concerned ScientistAugust 16, 2011 at 9:40 AM

    Renewables will continue to grow and natural gas is a very good complement to renewables. As you point out, we need a backup for when the wind isn't blowing and the sun isn't shining. Gas is also much better for heat than any other fuel.

    The anonymous poster is probably right that having too many eggs in one basket leaves us at the mercy of the oil and gas companies. We have been at their mercy for transportation fuels for a long time. Most of the time this seems to work out OK but recent price increases do show how this can impact the economy in a negative way. On the bright side, if a natural gas and electricity market can open up for transportation then we will have more diversity in that market than we ever have, at least in part due to the rise of shale gas.

  5. All points are well taken, especially with regards to gas and renewables gaining market share, reducing coal's dominance; however, there is a difference between the $6 gas you refer to and the current $4 gas (a difference of $2, I believe). Coal is still economically competitive, so it's not going anywhere anytime soon. As the stronger players weed out the weak, I would imagine fewer players with higher share of the supply (consider the deepwater in the GOM). With a better grasp on the supply and economics, I would imagine the industry would allow the gas glut to gradually work itself out, with prices rising slightly.

    Potential for export LNG and a globalized market is also another factor to consider that might have a significant impact on domestic supply and price. If we have 100 years of natural gas at 20 TCF per year, then that is about 2000 TCF (price considerations aside). If we ramp up to 25 or 30 TCF per year in the next twenty years, then we are looking at 65 to 80 years of gas. If we consider the differences in geology, land use, and available inputs (such as water), and required infrastructure, then that 65 to 80 might be further reduced.

    As a member of a slightly younger generation, I would hope that in the next 40 to 60 years of my life, the U.S. will suddenly have the foresight to come up with an energy policy that doesn't solely revolve around drilling/mining for more resources at increasingly higher costs. (Wishful thinking, I know.) Although gas represents a "bridge fuel" with many undeniable benefits, it also represents an opportunity to allow our leaders to procrastinate and encourage supply-side solutions, while ignoring the huge amount of wasted energy and negative externalities associated with drilling for oil and gas and mining coal.

    My concern is that by the time we near the end of the bridge at an accelerating rate of travel, we still will not have addressed the basic need to conserve energy and limit waste through proper leadership, investment and education.

    I also hope that industry will do a better job of overseeing pipelines and safety than it has in the past. It shouldn't be the public's burden or responsibility to ensure that industry is sticking to the highest of standards. Short term economic gain seems to be the number one priority (consider any API response to any safety/environmental management proposal that would increase costs for industry in any way... if that's the best industry can do, I think we are in for more of the same.)

  6. I totally agree that a focus alone on the supply side of all energy markets is a huge policy and consumer error. But there is some good news here. President Obama has won two increases in the corporate average fuel economy standards (CAFE), with the most recent one being a real game changer to 54.5 mpg. His administration has also rolled out the first standard for heavy trucks. On electricity, appliance efficiency standards are going up for air conditioners and many other appliances. Buildings codes where they exist are moving toward higher energy efficiency minimums, though the Pa Homebuilders are pushing back hard. Demand Response within PJM is now at a large and still growing 15,000 megawatts. Demand response is another game changer. Then market price of gasoline reaching $4 has also been a blunt instrument forcing some consumers to change behavior--move to more fuel efficient vehicles, consider where they live, explore car pooling or public transit. The opportunities on the demand side of these markets in the US are immense.