Growth in natural gas demand may not be a given consequence of efforts to cut greenhouse gas (GHG) emissions due to a trio of factors, a recent study has found.
According to The Brattle Group report “Prospects for Natural Gas Under Climate Policy Legislation: Will There Be a Boom in Gas Demand?,” relatively high carbon dioxide (CO2) price levels are needed for coal-fired power generation to be materially displaced by gas-fired generation. “Such price levels may not be reached in the next decade under a cap-and-trade program given the political constraints on regional impacts of energy price increases,” the report’s economist authors said.
The biggest obstacle to advancing gas demand growth is coal-fired power generation, they said.
“The protections and incentives offered to coal-fired generation under proposed cap-and-trade policies, including the allocation of free emission allowances to merchant coal generators, may keep coal plants operating longer and more frequently than they otherwise would, again limiting gas demand growth,” the report said.
“A large-scale retirement of coal plants would likely boost natural gas demand substantially. If such retirements are not forthcoming or if new coal-fired plants come online, gas demand is likely to be either flat or decline (especially if renewables development is successful).”
A second factor is that the development of renewable power generation tends to reduce gas demand in some regions by backing out gas-fired generation on the margin. “As a result, U.S. consumers may end up paying more for energy and CO2 emission reductions than would have occurred if natural gas were to be used more heavily,” according to Brattle.
Third, nonelectric gas usage is likely to stay flat due to continuing growth in conservation and energy efficiency programs and the price response to carbon, the report found.
The advantages of natural gas include lower emissions and carbon content relative to coal, low construction costs and short construction lead times for gas-fired power generation plants, the authors noted.
The prospects for a boom in natural gas demand due to climate policy “look doubtful absent a significant retirement of coal-fired power plants in the U.S.,” they said. “To the extent that renewables and energy efficiency measures crowd out gas-fired generation, gas may become even more of a marginal resource than it is today, increasingly subject to unpredictable and short-term power market conditions. This could lead to increased reliance on gas spot markets and potentially higher spot gas price volatility.”
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