Natural gas first emerged as a power generation fuel to replace dirtier coal. Lately, gas has cemented its reputation as the dominant source of reliable electricity in the U.S. as demand soars—and investors are loving it.
“Natural gas-fired generation is becoming more attractive to investors because of its critical role in balancing the grid amid increased load growth expectations, accelerated coal retirements and higher levels of intermittent generation,” Enverus analyst Corianna Mah said in comments on the release of a new report looking into the role of natural gas in the U.S. grid security and reliability.
Indeed the push to shift from hydrocarbons to alternative sources of energy and make the economy a lot more reliant on electricity than liquid fuels has really made natural gas stand out. When it became the dominant power source in the U.S. energy mix, that was the result of abundant supply thanks to the shale boom and the fact that gas burns more cleanly than coal.
To date, despite the substantial growth in wind and solar, gas remains the dominant energy source, providing 43% of U.S. electricity, with wind, solar, and hydro all together a distant second, providing 21.4% of the country’s electricity. And only gas can ensure electricity is there on-demand.
This advantage of gas, coal, and nuclear has regained its well-deserved prominence recently as Big Tech rushed to secure electricity supply for the data centers it needs for its artificial intelligence products. Wind and solar were all very well and very clean, but they were unable to provide the kind of round-the-clock steady power supply these data centers needed. So Big Tech turned to gas and nuclear.
“Never have I seen such strong prospects for North American natural gas demand growth,” TC Energy’s chief executive, François Poirier, said in August. “We are seeing natural gas demand reach record highs, and this is expected to grow by nearly 40 Bcf/d by 2035.”
Indeed, power generation data from climate outlet Ember showed that natural gas has pushed the United States’ overall dependence on hydrocarbons for electricity higher than China’s. Since June 2024, high U.S. summer electricity demand has been mostly met by increased gas-fired power generation, while a rebound in hydropower in China has limited to some extent the share of coal in its electricity supply.
As a result, hydrocarbons – including natural gas and coal – have had an average share of 62.4% of total electricity output in the United States since June. This compares to a lower fossil fuel share in the coal-dominated power system in China, where fossil fuels accounted for 60.5% of generation between June and September.
This state of affairs is unlikely to change. Earlier this week, the chief executive of BP Murray Auchincloss said that the AI race among Big Tech majors would drive natural gas demand in the U.S. even higher.
“Hyperscalers are driving crazy demand into natural gas right now,” Auchincloss said at an investor presentation, as quoted by Bloomberg. “I’m pretty optimistic on natural gas prices through the decade.”
Indeed, Auchincloss is not the only one optimistic on natural gas prices. Most industry executives are also optimistic thanks to the surge in demand driven by the tech industry—and population growth, which caught power utilities unaware earlier this year after everyone assumed demand growth had peaked in the 2010s, because that growth was followed by an extended plateau.
However, “burgeoning data-centre development, a resurgence in energy-intensive US manufacturing, and greater transport and heating electrification” have promoted “electricity demand growth not seen since the 1990s,” Wood Mackenzie analysts wrote in a recent report looking into demand and the supply outlook.
Speaking of supply, it might get tight, even in natural gas. U.S. power generation from natural gas surged by 20% in the first nine months of this year compared to the same period in 2019. The share of gas in power supply has jumped to 43% from 38% five years ago. There are plans to add new gas-fired generation capacity to meet the rising demand. Yet it takes years to bring these new power plants on, meaning the near future may very well hold an electricity market demand imbalance and higher prices.
Natural gas production, meanwhile, is on a downward trajectory, driven by persistently low market prices for the commodity. The situation may seem paradoxical, but let’s remember that much of the booming demand for electricity is projected rather than current, and it would take some time before the surge materializes—which would hinge on new generation capacity being added to the grid.
However long it takes, one thing seems clear, regardless of how anyone in government or transition circles feels about it. Natural gas provides a reliable electricity supply independent of weather patterns and the Earth’s revolutions around the Sun. Big Tech and its AI drive just reminded everyone about it.
By Irina Slav for Oilprice.com
