Just as the natural gas industry unveils a smorgasbord of significant supply growth potential, the power sector is cutting gas from its diet, according to an analysis by Barclays Capital.
"We start with a reminder that the power sector has been the sole source of gas demand growth for the gas industry this decade," analysts Jim Crandell, Biliana Pehlivanova and Michael Zenker wrote in a note late Tuesday. "To a significant degree, as goes the power industry so goes the demand trajectory for gas."
The "only reason" power sector gas demand has grown this year, they wrote, is "because of the displacement of coal-fired generation. We expect the pullback in gas demand in the power sector in 2010 to overwhelm demand growth in the residential, commercial and industrial sectors, for a year of aggregate demand loss (down 0.6 Bcf/d compared with 2009 levels)."
The problem for gas is that two "waves of new, nongas capacity" are about to slam the gas markets, said the trio. First to arrive is a "gaggle" of coal-fired units launched "when gas prices were higher and volatile," and when the "conventional view" (pre-2008) was that North America was running out of gas.
"We count a total of 16 GW of new coal units entering service over the next four years," said the Barclays team. "While a much higher number is proposed, this is our best estimate of the amount that will be placed in service...A little less than half of the 16 GW...is planned in market regions where gas is most frequently on the margin, suggesting that these coal units will run infra-marginally compared to gas."
Wind and other renewables generation also will impact the gas market, but how much is still unknown, said the analysts. The Energy Information Administration, they noted, "expects 267 GW of new, nonhydro renewables capacity added by 2020," but "most of this capacity will not be available until after 2011."
The range for future nongas build and power demand growth is wide, said Crandell and his team. However, "regardless of the power growth and nongas buildout assumptions, the inescapable conclusion is that the diminished growth outlook for gas clashes with the newfound abundance of the fuel...
"We hasten to point out that it is not inevitable that gas in the power sector has a dim future...The challenges of upgrading the interstate transmission system remain the Achilles heel of the renewables buildout. Also, cap-and-trade legislation is not a done deal," they said. "That natural gas is both cost-effective and clean burning has been recently lost in the debate, but perhaps just for now."
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