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You Dropped a Bomb on Me - The Power Generation Drivers of East Coast Gas Demand Growth

The worst of this winter’s cold has passed, but the impact of structural changes in U.S. power generation will be felt in natural gas markets for years to come. The generation mix has been changing rapidly in recent years, and the switch from coal to gas is happening at an even faster pace on the East Coast than in the country overall. This switch reflects both coal-plant retirements and ongoing competition between remaining coal plants and gas plants. But low-cost gas supplies in the Marcellus and Utica plays don’t always have ready access to the biggest consuming markets, and this winter, we saw how the increasing call on gas for Eastern power generation can stress the gas pipeline grid and cause price blowouts. Today, we continue a series on Eastern power generation and prices by untangling the sources and drivers of gas-fired generation growth in the region.

In Part 1 of this series, we looked at the contagion in high East Coast gas prices this winter. We found that U.S. gas demand for power generation is increasing structurally, though volatile weather and gas prices can sometimes obscure this trend. Also, we noted that on the coldest days a high percentage of the gas flowing to areas with limited pipeline capacity is committed to serving residential and commercial heating customers. During these frigid periods, the power sector is sometimes forced to turn to more expensive alternative fuels such as imported liquefied natural gas (LNG) or fuel oil for power generation as far south as the Carolinas. Today, we’ll address the where and why of power demand growth for gas to date along with the prospects for continued growth.

The U.S. power generation mix is changing quickly. The rapid development of new wind and solar capacity has made headlines, and not without reason. Between 2006 and 2016, combined generation from these two sources increased from 1% of the U.S. electricity mix to 6%. But the bigger shift has been the transition from coal to gas as the primary source of U.S. electricity. In the same 11-year period, coal fell from 49% to 30% of the U.S. generation mix, while gas rose from 20% to 34%. In gas consumption terms, this is equivalent to more than 10 Bcf/d of growth.

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