Energy Sector Drives Growth in US Natural Gas Demand, Energy News, ET EnergyWorld

LITTLETON: The power sector is the only major consumer of natural gas that has seen steady growth in demand in recent years. It has become a driving force for natural gas demand in the United States, while other sectors have seen declining use.

LSEG data shows that natural gas use by power plants has grown by about 3.5 percent annually over the past three years, making it by far the single largest source of gas use in the U.S.

In volume terms, however, the increase in natural gas consumption by the power sector was outweighed by declines in other sectors. Average gas consumption by power companies increased by 70 billion cubic feet per day in 2023, while average combined consumption by industry, households, and commercial users fell by 114 billion cubic feet per day.

Energy companies accounted for about 44.4% of total household gas consumption in 2023, while industry accounted for 29%, households for 15.5% and commercial users for 11%.

According to LSEG gas demand models, industrial gas demand has fallen by about 0.3 per cent per year over the past three years, while household and business demand has fallen by about 0.5 per cent and 0.7 per cent per year, respectively.

The increasing concentration of gas use in the power sector poses potential risks to the U.S. gas production sector as further rapid decarbonization of the power system could result in a sharp decline in gas demand for power generation at a time when other major sources of consumption are already in decline.

ELECTRIC PUSHING

Widespread efforts to electrify some heating and power systems in homes and businesses have contributed to much of the reduction in non-energy gas use.

In recent years, many homes and businesses have replaced gas-fired furnaces with heat pumps and boilers powered by electricity, but sales of heat pumps have slowed due to high electricity prices and interest rates.

According to the Air-Conditioning, Heating, and Refrigeration Institute (AHRI), a record 4.3 million heat pumps were sold in the United States in 2022. It was the first year that heat pump sales outpaced gas furnace sales in the country.

Heat pump sales fell to 3.6 million units in 2023 and totaled 1.564 million units through May 2024 compared to 1.643 million units in the same months in 2023, AHRI data shows.

Despite the slowdown in sales, the total impact of installed dispensers on gas demand increased as each unit displaced a certain amount of direct gas consumption.

POWER BUTTON

Estimates of the exact amount of natural gas displaced by heat pumps are scarce because most industry assessments are based on cost savings rather than the amount of fossil fuel reduction.

The environmental impact calculus is further complicated by the fact that many heat pump installations often replace one type of energy use with another – from direct gas combustion in on-site boilers to electricity supplied by energy companies.

And because this additional electricity must in turn be generated largely by energy companies, the ultimate impact on overall U.S. gas consumption remains difficult to estimate.

Nevertheless, high-level demand data reveal clear trends.

Total U.S. natural gas consumption in the first half of 2024 increased by 2.3% compared to the same months in 2023.

LSEG data shows that demand for gas among electricity producers rose by 5.2% compared to the first half of last year, while demand among all other major gas customers rose by just 0.5%.

Among non-electricity applications, gas demand among industrial users in the first half of 2024 was 3.1% higher compared to the same period last year, but fell by 2.5% among households and by 1.2% among commercial users.

This wide variation in consumption trends suggests that gas consumption among non-electricity users may be approaching a peak, while that in the electricity generation sector will continue to grow.

GAS GROWTH

The steady increase in the share of electricity generated from natural gas over the past five years further illustrates the importance of the energy sector to the natural gas industry.

According to the think tank Ember, in 2023 natural gas would account for 42.41% of industrial-scale electricity production.

That share compares with 35% in 2018 and 24% in 2010, and shows how utilities have increased their reliance on natural gas for electricity generation while gradually reducing their coal-fired power generation.

Coal’s share of electricity generation in the US in 2023 was 16 percent.

compared with 27 percent in 2018 and 45 percent in 2010, Ember data shows.

Electricity production from solar and wind farms was 15.6% in 2023, compared with 9% in 2018 and 2.3% in 2010.

Electricity production from renewable sources is expected to continue to grow steadily in the coming years, which could help energy companies further reduce coal-fired power generation as part of their emission reduction targets.

However, electricity producers are likely to continue to use large amounts of natural gas to generate electricity because gas-fired power plants can be easily adjusted up and down to match fluctuations in electricity demand and to make up for generation shortfalls during periods of low renewable production.

DEMAND TRENDS

Overall U.S. electricity demand is likely to increase as more power consumers become electrified and overall power consumption for data centers and artificial intelligence computing increases.

In the short and medium term, such forecasts of higher electricity demand bode well for the natural gas production sector, even if direct gas consumption by households and commercial buildings continues to decline.

However, in the longer term, the continued concentration of gas demand in the energy sector poses potential risks to the gas industry.

Many utilities are planning to phase out gas-fired power generation and replace it with a mix of renewable energy generation and battery energy storage systems that can store excess renewable energy for later use.

All indications are that battery systems will remain too small to pose any significant risk to gas demand in the coming years.

However, if utility-scale battery systems continue to expand at a rapid pace, while their costs continue to fall, the wholesale renewables + battery targets could become a reality and begin to displace gas from power systems within a decade or so.

And if this happens at the same time that other sources of gas demand also contract, it could lead to a significant gas supply surplus.