Redefining the role of natural gas

While US power generation expansion remains focused on clean energy technologies like solar, wind and batteries, development strategies vary widely across the nation, reflecting underlying differences in state and regional industry regulations and environmental aspirations. Particularly noteworthy are regional differences in the role natural gas plays as demand growth accelerates.

Federal regulatory policy impact

To set the broad national stage, it is important to realize that the US has not legislated a comprehensive strategy for power sector decarbonization. While the Biden administration has set full power sector decarbonization by 2035 as a policy goal, such an aspiration does not have the effect of law.

Power sector decarbonization is controlled by two major federal-level activities: The Inflation Reduction Act (IRA) of 2022 incentivizes the development of zero-carbon energy such as wind, solar, geothermal and nuclear, as well as energy storage. While this supports a pathway to net zero, the IRA alone will not achieve President Joe Biden's power sector greenhouse gas emission goals of a 50%-52% reduction by 2030 (relative to 2005) and net zero by 2035.

Further policy efforts will be required to hit those targets. The US Environmental Protection Agency (EPA) has been ordered by federal courts to control CO2 emissions under the Clean Air Act, but as Congress has not provided supportive legislation, it has struggled to propagate regulations that can withstand legal challenges.

In its most recent effort, EPA finalized in April regulations covering emissions from new natural gas-fired and existing coal-fired power plants, and plans to issue proposed regulations covering existing natural gas units by end-2024. This is all likely to undergo extensive litigation, especially after the US Supreme Court's Loper Bright Enterprises v. Raimondo decision in June. This overturned what is known as the Chevron deference, which previously allowed agencies to craft regulations, knowing the courts would defer to agency interpretation of a statute.

Given these legal headwinds, S&P Global Commodity Insights does not factor the 2024 EPA regulations into its Planning Case outlook. Due to the substantial uncertainty around EPA's regulations and the lack of comprehensive legislation, analysts at Commodity Insights believe the administration's 2035 goals will not be met.

Even with aggressive decarbonization efforts by many large energy end-users and individual states, Commodity Insights expects the US power sector to still emit over 600 million mtCO2/year in 2050, representing 75% and 60% reductions from 2005 and 2022, respectively.

A patchwork of activities

The lack of a comprehensive federal decarbonization program creates an elevated role for individual states. Commodity Insights sampled a number of recently filed or approved utility integrated resource plans and discovered a consistent pattern:

• A continued focus on clean energy resources like solar, wind, storage batteries and energy efficiency for most new power generation construction;
• A schedule for the phased-in retirement of existing fossil-fired generation, both coal and older, inefficient natural gas plants; and
• A provision for the development of some new natural gas-fired generation, mostly to maintain grid reliability beyond what can be accomplished with clean energy resources. Depending on the region, new natural gas is also seen as a bridge that allows utilities to ramp up to serve new end users, such as data centers.

This new natural gas capacity is typically a small proportion of the total new build and is justified in the context of enabling the associated clean energy development. It is also aimed at serving accelerated load growth from end-users like data centers and the retirement of coal plants, thereby making the new gas generation an essential part of a utility's decarbonization strategy.

These plans remain contentious, with environmental advocates, clean energy developers and customer interest groups often raising objections about the necessity of the new gas generation. This is, however, consistent with Commodity Insights' observation that the need for such dispatchable long-duration resources is becoming a global trend.

Long-term view

Commodity Insights' long-term US power market view anticipates a sustained but evolving role for natural gas. Its most recent outlook calls for the size of the US gas power fleet to grow about 13% by 2050, from about 489 GW today to 552 GW in 2050. New construction will outpace retirements, and about two-thirds of the 2050 fleet is already in operation today.

Natural gas fleet operations are expected to significantly change as the role of natural gasfired generation realizes a diminished emphasis on providing energy and more focus is put on grid reliability. The operational change is focused primarily on combined-cycle technology, declining from a fleet annual average capacity factor of 63% in 2024 to about 42% in 2050. The average capacity factor for combustion turbines remains relatively constant in the range of 4%-6% through 2050.

The overall composition of the natural gas fleet will remain surprisingly stable, owing primarily to the amount of today's capacity that will still be online in 2050; 67% of the 2050 total gas-fired capacity was built before 2024. As a result, combined-cycle and combustion turbine fleet shares will change very little, while most simple-cycle steam capacity will be retired by 2050, and gas combined cycle with carbon capture and storage (gas CCS) and assets with hydrogen-firing capability will make only small inroads in terms of overall fleet share, despite the regulatory uncertainty of the looming EPA greenhouse gas 2032 compliance deadlines for new gas units and existing coal units.

Averages and general market trends mask profound changes over time and among various power markets. While the overall composition of the 2050 US gas fleet is expected to be surprisingly similar to today, this is the result of multiple – and at times offsetting – trends.

Through 2035, new combined-cycle construction slightly dominates new natural gas capacity additions, accounting for 44% of total new capacity, and combustion turbines account for 38%. The balance of new gas capacity additions consists largely of an often-underappreciated source of gas capacity, namely the conversion of existing coal units to gas steam units – a strategy followed by some coal plant owners to extract the remaining value of their coal assets while meeting interim carbon emissions reduction goals. Commodity Insights expects over 15 GW of coal-to-gas conversions through 2035, accounting for about 17% of the gas capacity added by that year.

Commodity Insights expects a significant transition in post-2035 natural gas capacity additions. As renewable energy continues to expand and the pace of coal retirements abates, there is less call for combined-cycle generation and an increased emphasis on combustion turbine development, accounting for 52% of new natural gas capacity additions in 2036–50. In some states, supportive regulatory treatment and favorable regional geology combine to cause a small boom in gas CCS development, accounting for 22% of new natural gas capacity in 2036–50. There is still a role for conventional combined-cycle technology in some regions post-2035, accounting for 25% of new builds.

There is also a significant regional variation in the new gas build narrative, especially after 2030. State-level regulatory pressures are expected to limit the development of conventional natural gas generation in many regions, including New York, New England, PJM and the Western Interconnection. This results in 94% of 2031–50 natural gas development occurring in SERC, Florida, MISO, SPP, or ERCOT, where regulatory policies are more conducive to replacing a portion of retired coal generation with natural gas. Commodity Insights also expects regional concentration of gas CCS technology in areas where state-level regulatory support combines with favorable geology, resulting in over 98% of gas CCS locating in ERCOT, MISO, SERC and California.

The evolution of gas capacity as envisioned in the Commodity Insights Planning Case suggests two major signposts to monitor:

The ability of natural gas developers to overcome environmental headwinds. Even in states supportive of new natural gas development, there will still be pressure from environmental advocates to wean the US power industry off gas as soon as possible.

The physical and financial condition of the existing gas assets in the northeast and western US. The avoidance of new natural gas construction in these regions hinges on the presumed continued operation of existing (and aging) natural gas assets to provide grid stability and some energy. This will require the regions to provide asset owners with adequate compensation for unit maintenance and periodic capital injections. As these assets are located in regions with the greatest resistance to natural gas fired power generation, these assets are exposed to some level of financial risk. If they are forced to retire, regional grid management will be much more difficult.

This article first appeared in the October 2024 edition of the Commodity Insights magazine.