US Power Puzzle Should Keep Gas in Mix Through 2050

Copyright © 2021 Energy Intelligence Group

Decarbonizing the power sector is critical if the US is to meet environmental goals -- and gas-fired power will likely play a significant role in that transition through 2050 and beyond. Not only will gas act as a bridge fuel in markets with firm decarbonization policies in place, gas' role should expand substantially in those markets where cost determines the generation mix more than carbon concerns, according to a recently released McKinsey study. Gas "accounts for 27% of US greenhouse gas emissions and plays a foundational role in decarbonizing other sectors, such as transportation and industry, by shifting them away from fossil fuels,” lead report author and McKinsey partner Rory Clune said. Just how that might occur is not so straightforward because the US does not have a singular power market but a patchwork of seven independent system operators (ISOs) that oversee 65% of the power bought and sold in the US, with the rest controlled by state-regulated, vertically integrated utilities. “Therefore, with little federal action on decarbonization, the states and ISOs are the ones setting the direction,” Clune and his team said. And that portends vastly different outcomes. Currently, 26 mostly blue-leaning states are “policy driven” -- that is, they have established targets to fully or mostly decarbonize their power systems over the next 10 to 30 years. This includes the New York ISO, California ISO and ISO-New England and parts of the Western Electricity Coordinating Council. The other 24 red-leaning states, which account for 55% of US power generation, are “cost driven” with no or limited decarbonization targets. That includes ISOs in Texas, the Midwest and Southeast. The largest ISO, PJM, which covers much of the mid-Atlantic region, is nearly evenly split as are the state’s politically. "While both types of markets will see at least some shift in generation toward zero-carbon sources -- including nuclear power, wind, solar, and other renewables -- they diverge in how far and how fast they might shift," Clune said. "Geography matters. Some markets, such as NYISO, have promising access to offshore wind; the Southeast and California are inherently attractive for solar generation." As a consequence, ISO-New England will move quickly to renewables given its access to offshore wind, reducing gas' share of capacity to 12% by 2050 from around 70% today. Eventually, gas plants will exist "chiefly to provide power when other sources, such as wind and solar, cannot," Clune said. But in MISO, where renewables are not as cost effective, gas-fired generation could make up 72% of the generation mix by 2050. "In cost-driven markets such as MISO, we expect installed gas generation capacity and the amount of power generated from gas to rise as low-cost gas replaces coal," Clune said. "In 2020, gas is approximately 23% of MISO’s generation mix and will grow to nearly 70% by 2040." Bottom line: "Owners of gas power plants could see rising demand for their output and favorable conditions for new plants in cost-driven markets, but rapidly decreasing utilization, high operational volatility, and tougher prospects for new investment in policy-driven markets." Gas Futures Crater Midweek US natural gas bulls had the lead early last week when the contract seemed headed to $2.80 per million Btu. But bears took over Wednesday emboldened by a smaller than expected, but seasonably robust storage withdrawal. But it could be weather outlooks that ultimately propelled Wednesday's 17.2¢ flush as forecasts for a cold early January are looking less certain. Bulls still couldn't find their footing in Thursday's shortened session that ended in a 9¢, or 3.5% loss to $2.518/MMBtu -- a level last seen in early December after traders first threw in the towel on winter (NGW Dec.7'20). That downdraft bottomed with a life of contract low $2.368/MMBtu on Dec. 8. And if a similar collapse is to be avoided some extended cold will have to emerge in the forecasts, Gelber & Associates analyst Daniel Myers said. January futures lost 6.7%, or 18.2¢, for the week.The contract rolls off the board Tuesday, Dec. 29, after the markets return from the long holiday weekend. The US Energy Information Administration reported a healthy 152 billion cubic feet storage withdrawal for the week ended Dec. 18, bringing working gas inventories to 3,574 Bcf. The draw was larger that the five-year average of 127 Bcf and last year's 146 Bcf pull, but 8 Bcf shy of expectations. Stocks are now 218 Bcf, or 6.5% above the five-year average and 278 Bcf, or 8.4%, higher than last year. Early estimates for the week ended Dec. 25 indicate a 136 Bcf pull for the holiday week, compared to five-year average of 102 Bcf and last year's 87 Bcf pull. Meanwhile, WTI February crude rose 11¢ Thursday to close at $48.23 per barrel posting a weekly loss of $1.01 and breaking a seven-week string of prompt-month gains. The January contract expired Monday at $47.74/bbl. Tom Haywood and Lisa Lawson, Houston

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