Peak Gas Is Coming to the U.S. Sooner Than Anyone Expected

One of the largest utilities in the U.S. put $8 billion into a bet that natural gas would dominate American electricity much like coal had before. “We really consider this to be a growth play,” Tom Fanning, chief executive officer of Southern Co., said in an interview just five years ago, as his company set on its landmark acquisition: natural-gas distributor AGL Resources Inc.

Gas looked to be on the verge of generational dominance at the time. The American fracking boom had made the fuel superabundant and cheap, hastening coal’s rapid decline, while energy from wind and solar had higher costs and lower reliability. A giant utility like Southern would naturally see gas pipelines and storage as the key to a durable and lucrative future, meeting demand that would continue to grow.

Now those expansive time horizons are in deep doubt. In fact, there are flashing signs that the U.S. power sector is approaching peak gas, with demand topping out decades ahead of schedule. “The era of robust growth in the U.S. natural gas market is likely coming to a close,” says Devin McDermott, an analyst at Morgan Stanley. “It doesn’t mean the market falls apart. It doesn’t mean gas demand falls off of a cliff. It means that we need less new supply going forward.”

Natural gas only fulfilled its destiny as the nation’s top power source in 2016, backed by hundreds of billions of dollars invested in the creation of a gas-based economy. Renewables could take over as the No. 1 power source on the grid as soon as 2028, according to projections by McDermott and Morgan Stanley analyst Stephen Byrd.

The American gas peak will mark a critical juncture—and it may have already been reached. McDermott expects overall U.S. gas demand growth in the U.S. slow to between 1% and 2% per year through 2030 as use by power generators shrinks by 2% to 3%. Overall demand could flatline or fall slightly if the Democrats win in November, a dramatic shift after years of record growth. “It’s a gradual trend, but it does add up over time,” he says.

By the end of the decade, McDermott forecasts that gas will no longer be the largest producer of electricity in the U.S. And the pace of the gas decline could be accelerated if the presidential election goes to Joe Biden, who has campaigned on the goal to eliminate carbon emissions from America’s power grids by 2035.

Some in the industry are making moves that indicate the writing is on the wall. Dominion Energy Inc., one of America’s biggest power companies, this summer agreed to sell substantially all of its gas pipeline assets. “To state the obvious, permitting for investment in gas transmission and storage has become increasingly litigious, uncertain and costly,” said Tom Farrell, Dominion’s executive chairman, in July. “This trend, though deeply concerning for our country’s economic growth and energy security, is a new reality, which threatens the pace at which we intended to grow these assets.”

Natural gas emerged out of the 2008-2009 recession as the fuel best suited to reduce U.S. emissions from electricity. It’s cleaner and more efficient than coal, and fracking’s success ensured it would be cheap and plentiful. That helped unlock coal’s grip on electric grids and supercharged gas economies in Pennsylvania and on the Gulf Coast. The U.S. soon switched from being a gas importer to one of the world’s leading exporters.

Renewables, meanwhile, still carried the stigma of hippie-ish science experiments that depended on government support and couldn’t provide around-the-clock electricity as long as the sun set and the wind ebbed. But the arrival of big-storage batteries has meant that wind and solar power will slowly be less dependent on the whims of weather, calling into question assumptions that there would be plenty of need for new gas alongside renewables. Solar farms backed up by batteries are already beating out gas on costs in parts of the U.S. Southwest , thanks in part to sharply falling prices of lithium-ion systems.

That dynamic isn’t limited to the U.S. A new report from BloombergNEF found wind and solar power are the cheapest form of new electricity in most of the world today, including the U.S. In the next five years, it will be more expensive to operate an existing gas power plant than to build solar arrays and wind farms, according to the research group.

This shifting landscape is among the reasons why major gas-turbine makers, including Mitsubishi Power, are working with power-plant developers and utilities on billions of dollars in projects that will eventually burn hydrogen instead of gas. And a staggering 25 gigawatts could be available in the U.S. in 2029, research organization Wood Mackenzie said in June, up from “near-zero” mid-year.

How did the landscape change so fast? First and foremost, it’s economics.

The price of power from solar arrays and onshore wind turbines continues to plummet, and both technologies lack fuel costs. Renewables are undercutting new gas-fired plants on cost alone in sunny California and the fossil-fuel hotbed of Texas, as well as across the Plains and parts of the South.

More than 53 gigawatts of clean power are likely to be added in the U.S. by April 2023, nearly doubling that of natural gas, according to an estimate earlier this year by the U.S. Federal Energy Regulatory Commission. This trend has contributed to several utility giants—including Southern—pledging to go achieve net-zero emissions within decades.

“The tide is turning. It used to be that you talk about renewables in Texas, you might as well get a rope,” says Cody Moore, head of gas and power trading at Mercuria Energy America based in Houston. “The narrative has changed. Now it’s ‘brag-o-watts.’”

Second, it’s politics. Gas has simply fallen out of political favor in much of the country as lawmakers try to combat climate change. These future targets can be felt in the here and now. New York’s push to derive 70% of its electricity from renewables by 2030 contributed to the recent scrapping of two gas-pipeline projects. The electricity sector accounted for about 27% of U.S. greenhouse gas emissions in 2018, according to the Environmental Protection Agency.

Political targets are speeding up, too. California’s pledge to decarbonize its electrical grid by 2045 was seen by critics as implausible two years ago. Last month, in the middle of the state’s worst-ever fire season, Governor Gavin Newsom indicated a new urgency: “2045’s too late,” he said.

Biden’s climate plan, meanwhile, would greatly reduce gas’s role on the country’s grids in favor of renewables. That would “end gas consumption effectively” for the power sector, McDermott says, unless carbon capturing technology goes mainstream, something the Democratic nominee has talked about. “It’s not a nail in the coffin for gas demand, but it’s a big headwind for gas over time.”

This push back against gas is prompting U.S. drillers, pipeline operators and utilities to grapple with their emissions and prevent the loss of what’s called the social license to operate. That’s the baseline of trust and acceptance from local communities in which gas is produced and used. For decades this wasn’t seen as a challenge, owing to the status of natural gas as the cleaner burning fossil fuel compared to coal and oil.

But that social license is coming under scrutiny because the primary component of natural gas is a powerful greenhouse pollutant—methane—that’s more than 80 times more potent than carbon dioxide in the first two decades. The infrastructure built to support the American gas economy hasn’t done enough to prevent significant methane leaks. Burning natural gas also creates carbon dioxide, even if the toll is less than other fossil fuels.

The problem is there’s no clear idea of how much methane is being leaked. A new generation of emission-detection satellites are just starting to provide insights into the scope of the problem. There are signs that big players in the gas industry are taking leaks more seriously. Duke Energy Corp. recently announced a net-zero emissions target for 2030, with a goal to eliminate methane leaks from its supply chain and only buy gas that is certified for low-emission practices.

Peak gas is not the same as a eulogy for the fuel, which will continue to be used for years. Natural gas will likely remain the dominant electrical source in the U.S. for much of this decade, and play a major role for longer. In one irony, the consequences of climate change might make some grids reluctant to give up gas. After California’s power grid failed during a historic heat wave this summer, for example, the state extended the life of four natural gas plants that had been slated to retire.

Southern looks back without regrets on its deal in 2015 for natural-gas distributor AGL Resources, which it still sees driving growth. “That perspective has not changed,” says Kim Greene, chief of Southern’s gas unit. “Our gas business is growing, and we are investing heavily.” Still, Southern is among several utilities that have announced net-zero emissions goals by 2050.

On the other side, Calpine Corp., the country’s largest owner of fossil-fuel generation, sees gas use peaking across its power plants by 2030. In an interview, Calpine CEO Thad Hill says there will be growing value even in gas power plants whose capacity is used less.

Utilities, big oil, tech giants and retailers are all adopting climate targets that are already chipping away at gas’s dominance in power and beyond. This reality hasn’t yet come into full view, masked by a record summer of demand for the fuel from generators. Prices fell to a quarter-century low during the coronavirus pandemic while extreme heat boosted the need for electricity.

“It was the perfect environment to unfold this summer, which staved off losses,” says Teri Viswanath, lead economist of power, energy and water at CoBank ACB. “In the power sector, this may be the last hurrah for gas.”

Morgan Stanley’s McDermott puts it another way: Gas prices will rise from the current lows and run into surging renewable electricity, eroding America’s need for further fruits of its fracking boom. The U.S. power sector “will never hit that level again,” he says. “We hit peak gas demand.”