The U.S. natural gas industry continues to shift from its primary role as fuel for heating and cooking to the dominant fuel of choice for U.S. electrical power. This move is prompted by consistently low prices, production efficiency gains and regulatory drivers. Yet in key markets across the United States, the “rush to gas” creates critical uncertainties about whether abundant supplies will have access to the pipeline capacity needed to meet local and regional demand.

In addition, another key issue facing the power industry is how the gas and electric sectors work to more closely align their businesses. This will be essential to the success of each and to ensuring the stability of the grid, as legacy assets are retired and renewable energy resources continue to grow as a source of generation. These are some of the issues that emerged from the 2015 Strategic Directions: U.S. Electric Industry report from Black & Veatch.

“Expectations for an increased role for natural gas in the power sector are apparent across the country,” said Neil Copeland, who provides energy asset forecasts for Black & Veatch’s management consulting business. “These beliefs are particularly acute in the Mid-Atlantic and Northeastern U.S., where large numbers of coal assets will retire by 2017.”

At the same time, Copeland noted that across the country, only 11 percent of respondents selected “new baseload generation” as the primary driver for natural gas generation.

“This outlook indicates that the natural gas generation market is more of a replacement game than one focused on new builds because of relatively flat overall demand growth,” Copeland said.

Nearly a quarter of respondents indicated they saw a role for natural gas as a fast-response backup for renewables. This relationship was particularly strong in the Southwest U.S., where 40 percent of respondents expect new gas generation to support renewable resources.

Natural Gas Pipeline Capacity May Struggle to Meet Demand

Still, pipeline capacity is increasingly a material issue facing the natural gas industry, according to Denny Yeung, Principal, Oil & Gas Strategy Practice, Black & Veatch’s management consulting business. For decades, U.S. natural gas pipeline infrastructure centered on the needs of its local distribution company customers, providing heating and cooking fuel. Pipelines were developed to support these customers, and the abundance of coal and nuclear resources made it easy for gas generators to secure pipeline capacity on an as-needed basis.

“But with more power being generated from natural gas, there are regions such as New England, the Mid-Atlantic and the Southeast that now – or may in the future – experience demand for pipeline capacity that exceeds availability,” Yeung said.

The issue of pipeline constraints has been widely documented in New England and New York where natural gas prices during peak winter months in 2013 and 2014 occasionally exceeded the Henry Hub price by a factor of 10 or more.

These regions have seen a flood of interest from developers and utilities seeking steady returns from power generation assets. However, the overall difficulty of completing new pipeline projects, due to the competing priorities of residents, municipalities and regulators, reflects the realities on the ground.

Collaboration Necessary Between Gas and Electric Sectors

Overall, there is a lot of industry interest in developing natural gas assets, thereby explaining why access to capital is not viewed as a major issue, Yeung said. With regulations and market drivers such as capacity performance evolving, one area to watch will be the role of gas in firming renewable resources. This is important, Yeung said, as the cost of acquiring firm gas supply is growing exponentially, with the pipeline capacity market the most significant area to observe.

“As the industry looks to the future, it is imperative that the natural gas and electric power generation sectors begin to find ways to work together on a more collaborative basis,” Yeung said. “Recent activities at the Federal Energy Regulatory Commission (FERC) have attempted to address this issue, but both sides remain unfulfilled and skeptical of one another.”

Copeland noted that some positive steps have occurred, including the addition of another daily nomination cycle for the gas pipelines, will help to bridge the gap between the two industries. Yet further steps still need to be taken. “The electric industry is now considering adjusting the definition of its ‘electric day’ to perhaps match the definition of the ‘gas day’ on the pipelines,” Copeland said.

Firming Fuel Supplies

While these steps help to address the mismatch of the two industries, they do not fully address the issue of the need for new pipeline capacity.

“Regulators and market participants must come to the realization that to provide ‘firm power,’ one needs access to ‘firm fuel,’” Copeland said.

For coal plants, the firm fuel was located on the coal pile adjacent to the plant, along with the long-term coal supply and rail transportation contracts that provided the fuel, he noted. In the natural gas business, firm fuel means a commitment to firm pipeline capacity, firm gas supply and the ability to deliver the gas to the plant when it is called upon.

“For the industry to successfully accomplish this goal, all market participants must continue to work together in a collaborative fashion, recognizing that there is no easy fix to this problem,” Copeland said.  “Additional investment in infrastructure may be required to ensure that the public continues to have access to safe, reliable, affordable energy well into the future.”

Published originally on Black & Veatch Solutions