Column: Power sector drives growth in U.S. natural gas demand

The power sector is the only major consumer of natural gas that has shown consistent demand growth in recent years, and has become the driving force behind natural gas demand in the U.S. as consumption from other sectors declines.

Natural gas use by power generators has expanded by around 3.5% a year over the past three years, and is by far the largest single source of gas use in the U.S., data from LSEG shows.

However by volume, growth in natural gas use by the power sector was outweighed by declines in others. Average gas consumption by power firms grew by 70 Bft³d in 2023, while average combined consumption by industry, households and commercial users fell by 114 Bft³d.

Power firms accounted for around 44.4% of total domestic gas use in 2023, compared to around 29% by industry, 15.5% by households and 11% by commercial users.

Industrial gas demand has declined by around 0.3% a year over the past three years, while residential and commercial gas demand has shrunk by around 0.5% and 0.7% annually, respectively, according to LSEG's gas demand models.

The growing concentration of gas use within the power sector poses a potential risk to the U.S. gas production sector, as further rapid decarbonization of power systems could trigger a swift decline in gas demand for power while other major consumption sources are already in decline.

Electric push. A broad push to electrify certain heating and power systems across homes and businesses has accounted for much of the cuts to gas use outside power generation.

Electricity-powered heat pumps and boilers have replaced gas-fired furnaces in scores of homes and businesses in recent years, although the pace of heat pump sales has slowed due to high electricity prices and interest rates.

A record 4.3 MM heat pumps were sold in the U.S. in 2022, which was the first year that heat pump sales surpassed sales of gas-powered furnaces in the country, according to the Air-Conditioning, Heating, and Refrigeration Institute (AHRI).

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

Despite the slowing sales pace, the cumulative impact of the installed pumps on gas demand has expanded, as each unit has displaced some quantity of direct gas consumption.

Power switch. Estimates on the exact volumes of natural gas displacement by heat pumps are scant, as most assessments made by industry tend to be in terms of cost savings rather than in terms of the volume of fossil fuel consumption that is cut.

Further complicating the gas-impact calculus is the fact that many heat pump installations often substitute one type of energy consumption for another—from the direct burning of gas in on-site boilers to electricity supplied by power firms. And as that additional quantity of electricity must in turn be generated mainly by power firms, the net effect on overall gas use in the U.S. remains hard to discern.

That said, high-level demand data reveal clear trends.

Total U.S. natural gas consumption during the first half of 2024 was up 2.3% from the same months in 2023.

Gas demand from power producers was up 5.2% from the first half of last year, while demand from all other major gas users was up just 0.5%, LSEG data shows. Among non-power uses, gas demand was 3.1% higher among industrial users during the first half of 2024 from the same period last year, but down 2.5% among residences and 1.2% lower among commercial users.

That wide divergence in usage trends suggests that gas consumption may be close to peaking among non-power users, while continuing to expand in the power generation sector.

Gas growth. A steady increase over the past five years in the proportion of electricity generated from natural gas further illustrates the importance of the power sector to the natural gas industry.

Natural gas generated 42.41% of utility-scale electricity production in 2023, according to energy think tank Ember. That share compares to 35% in 2018 and 24% in 2010, and reveals how power firms have beefed up their reliance on natural gas for electricity generation while steadily reducing generation from coal.

Coal's share of U.S. electricity generation was 16% in 2023, down from 27% in 2018 and 45% in 2010, Ember data shows. Electricity generation from solar and wind farms was 15.6% in 2023, compared to 9% in 2018 and 2.3% in 2010.

A further steady expansion in renewable electricity generation is expected over the coming years, which may help power firms make further cuts to output from coal-fired plants as part of emissions reduction goals.

But power producers look set to remain heavy users of natural gas for electricity generation, as gas plants can be easily throttled up and down to match the ebbs and flows of power demand needs and to plug any generation shortfalls during periods of low output from renewable sources.

Demand trends. Total U.S. electricity demand looks set to expand as more energy end-uses become electrified and as overall power consumption climbs from data centers and due to artificial intelligence computations.

Over the near to medium term, that higher power demand outlook bodes well for the natural gas production sector, even if direct gas use in households and commercial buildings continues to contract. But over the longer run, the continuing concentration of gas demand among the power sector poses a potential risk for the gas industry.

Several utility systems have plans to phase out gas-fired generation and replace that power with a combination of renewable energy generation alongside battery storage systems that can store surplus renewable power for later use.

Over the coming years, battery systems look set to remain far too small to pose any significant risk to gas demand. But if utility-scale battery systems continue their recent rapid growth while dropping in cost, goals for wholesale renewables + battery systems could become a reality and start to squeeze out gas from power systems in a decade or so.

If that occurs while other sources of gas demand also shrink, a major gas supply surplus could materialize.

 

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