U.S. Natural Gas Generation Powers Ahead

Dustin Meyer
Posted May 19, 2020

Natural gas’ economic competitiveness continues, even amid the highly unexpected market conditions associated with the coronavirus pandemic – outcompeting coal, the No. 2 fuel for power generation.

While consumer electricity use patterns are changing as power demand throughout the country has declined during the coronavirus crisis, natural gas is playing a growing role in meeting that demand.

This shift towards greater reliance on natural gas – along with a corresponding decline in coal-fired generation – has been a key feature of the U.S. power sector for most of the past decade, and the current environment appears to be accelerating this trend. In fact, the coal-to-gas transition is starker during this historic season as lower electricity demand, coupled with low natural gas prices, is providing added incentive for power suppliers.  

What we see in the data today is that the electricity sector’s response to the current coronavirus-induced demand decline favors the increased deployment of low-cost natural gas for power generation. It is clear that the low cost of natural gas positions it to be a reliable, affordable and resilient fuel of choice, even in the most unanticipated environments – and this trend is playing out around the world.

Electricity Demand and Coal to Natural Gas Switching

For new, dispatchable, thermal builds, lower demand for electricity, which has been sluggish for years, has meant an almost exclusive, nationwide shift to natural gas as high-cost power providers responded by trying to increase the cost-efficiency of their operations.

But what happens when stagnant, but generally well forecasted, electricity demand dramatically plummets in unpredictable ways – as has happened amid COVID-19? Competition becomes even tougher. Bulk electricity providers and regulators consistently try to plan for various contingencies, which can then be used to inform best practices and policies in some cases. No two extreme contingencies are alike, but it’s still illuminating to look at how the electricity market data we see today has adjusted in light of the current unprecedented environment.

Across the country, power demand has declined significantly amid the pandemic. In this low-demand environment, natural gas has continued to outcompete higher-cost coal for market share. Natural gas’ affordability and reliability as a power source have helped accelerate its growing lead over coal in day-to-day electricity supply. Natural gas sustains customer demand even in tougher market conditions.

Current Demand Outlook

Energy serves as the backbone of our economy, so when day-to-day business activity shifts, so do our energy consumption habits. While residential electricity demand may certainly increase as many Americans stay at home, this has not made up for lost demand in the commercial and industrial sectors.  The current demand downturn does not follow any cyclical pattern and can be thought of as a shock to the system – it has caused both demand and wholesale prices to fall.

The following charts demonstrate year-over-year changes in electricity and natural gas demand, as well as U.S. energy prices, to provide a fuller picture of the coronavirus pandemic’s impact on power markets.

Electricity Demand Past 13 Months

The chart above shows the difference in springtime power demand between March 2019 (far left) and April 2020 (far right). Starting at the far left you see a normal annual electricity demand cycle, typically low in the spring followed by a peak in the summer, with demand rising in step with temperatures.

But the impact of the coronavirus pandemic is already showing up in the data for 2020. Looking at the far right of the chart, the demand data shows that the typical pickup heading into summer isn’t really happening. This is unsurprising since commercial and industrial demand have plummeted.

Now, to dissect the numbers a bit, the U.S. Energy Information Administration (EIA) provides hourly power generation data so the public can see which sources are providing electricity every hour of every day. Below, taking the same 13-month period, EIA data shows a clear separation in natural gas (blue) and coal (gray) hourly dispatch, which widens around late winter/early spring 2020. The chart also shows that in 2019, coal dispatch started to pick up in late spring/early summer – but this year, the opposite is happening.

This chart illustrates the notable distancing between natural gas and coal dispatch for hourly electricity generation. Nationally, even while electricity demand is relatively low, natural gas is outcompeting coal for market share beyond even the recent past. This dynamic is even more pronounced in coal-heavy regions. The next chart shows this separation occurring in the Regional Transmission Organization (RTO) PJM, which spans much of the mid-Atlantic and some of the Midwest.

A recent report from Energy Ventures Analysis (EVA) shows a continuation of this market shift in PJM. EVA illustrates that, while annual natural gas demand did not overtake coal on a fuel consumption basis until 2016, natural gas surges past coal through their modelled time frame (end of 2021). The trend was particularly pronounced in February, when coal accounted for only 19% of generation while natural gas rose to 39%. Even once demand returns to normal in PJM, EVA projects the fuel mix will continue to be increasingly dominated by natural gas.

The same trend has been apparent in other regions this spring as well. In the same report, EVA notes that natural gas generation has increased this year in the Great Plains (+25%), Florida (+7%) and the Southeast (39% of total generation), while coal has declined – often precipitously. In fact, across the U.S., total natural gas demand in the power sector increased by 2.8 BCFD, while coal demand fell about 34 million tons through the first few months of the year.

For interested readers, EIA provides similar data for other regions here.

Natural Gas and the Future Energy Mix

The growth of natural gas in the power sector throughout the past decade is a result of the economic competitiveness of the resource. This was evident in the decades-long earned electricity market share growth, as demand conditions put pressure on greater efficiency and lower costs. This is a trend that continues in a transformed electricity market.

Today, the electricity sector’s response to the current coronavirus-induced demand shock favors the increased use of economically competitive natural gas for power generation. Natural gas use has expanded in an increasingly competitive­­­ environment, so it is not surprising that the fuel has remained cost effective and resilient during this unexpected downturn. And the environmental benefits of coal-to-natural gas switching – the leading reason carbon dioxide levels are currently at their lowest levels in a generation – give the fuel added staying power.

Breakthroughs in natural gas production, growing demand for cleaner energy, and increased interest in flexible generation technology mean that natural gas is meeting these needs. By growing its relative market share in an era of uncertain demand, natural gas demonstrates its long-term importance to the U.S. energy mix.