Commodities | Feb 11 2009
By Chris Shaw
The past decade has seen a solid relationship between the power and natural gas industries in the US market in particular, as the need for power (electricity) has been the major driver of growth in natural gas demand. This reflects the increasing attractiveness of natural gas plants given cost and emissions advantages when compared to alternatives such as coal and nuclear power.
As an example of how important gas fired power plants have become, Barclays Capital estimates in the US market in the past 10 years there has been more than 200,000MW of new capacity added, reflecting both the cost and emission advantages mentioned above and the fact these plants can be built in urban areas.
But as Barclays notes, the economic slowdown of the past several months has seen the natural gas industry switch from its previous concerns over the ability to meet the growing demand of power plants to trying to find new sources of demand at the same time as drilling is scaled back in an attempt to better balance the market.
The lower capital but higher fuel costs make gas plants typically among the last to be operated to meet power demand, meaning gas-fired plant output swings more than other sources. While US power output rose by 1.6% annually from 2000 to 2007 natural gas output grew significantly in both absolute and percentage terms given its role as the swing producer, to the extent natural gas represented 21% of total power production in the US in 2007. Since the start of the decade gas-fired plants have been responsible for 73% of the growth in electricity output.
But power sector consumption of natural gas fell in 2008 as the economy turned down and Barclays expects this trend will continue through 2009 given the weak economic outlook. On the group’s forecasts, assuming the US economy contracts by 1.9% this year there is likely to be in the order of a 1.3% fall in power usage, which flows through into weaker gas demand.
Any downturn is not expected to be significant though and taking a longer-term view the group sees a solid outlook for natural gas demand given demand for power should continue to grow. This view even allows for the growing use of renewable energy sources as Barclays points out while there has been a push for renewable energy sources in many states of the US, the growth in power output from natural gas plants has far exceeded that of the alternative renewable sources.