How Natural Gas Stopped Being Green

But no less essential to clean, affordable electricity

Remember when natural gas was considered green? City buses and other public services vehicles across the country proudly advertised “We run on clean burning natural gas.”

The Obama Administration’s Federal Energy Regulatory Commission literally never met a natural gas pipeline it didn’t like, approving literally every project proposed from 2009 through 2016. And most of the same appointees OK’d a record 1,644 miles of pipe in 2017.

According to Energy Information Administration data, use of natural gas to generate electricity increased 88.4 percent from 2007 through 2022. The fuel’s share of US power generation rose from 21.6 percent to 39.8 percent.

Gas’ rise was pretty much at the expense of coal. Use of the black mineral to produce electricity dropped by -58.9 percent from its all-time peak in 2007. Its share of generation fell from 48.5 percent to just 19.5 percent. And the trend continues, with many US utilities now planning to phase out the fuel entirely by 2030.

Natural gas’ rapid replacement of coal is due to several factors. First, even as coal usage peaked in 2007, the majority of US coal power plants were approaching the end of their useful lives. And of the 107 or so large combined cycle plants expected to replace them, only two ever went into service, both at meaningfully higher costs than initially anticipated.

That left a massive supply gap natural gas was ideally positioned to fill. Generators have used existing transmission infrastructure to either replace or retrofit existing facilities. Gas power plants could be sited, permitted, finance and built in as little as 18 months. And the shale revolution drove up domestic supply and slashed fuel costs once they entered service.

Natural gas also has numerous environmental advantages over coal as a power source. The new generation of coal plants was designed to strip out acid rain gases, mercury and particulate matter by gasification. But by using suddenly cheap and abundant gas instead of coal, generators eliminated the need for that step entirely.

The more the existing US coal fleet has aged, the greater the cost savings generators have realized by switching to natural gas. That’s ensured regulators’ support. And savings have more than offset the impact on customer rates from investment in new plants—which has increased utilities’ rate base and earnings power.

Depending on the study, burning natural gas to generate electricity emits about half what coal does of the CO2 and other greenhouse gases blamed for climate change. And making the switch for generating electricity—as well as swapping oil for gas in home heating—is the single biggest reason US CO2 emissions have declined almost 25 percent from their peak in 2007 (Statista data).

Gas switching has also arguably opened a window for investment in renewable energy, also because lower operating costs have enabled utilities to invest without jacking up customer rates. In fact, other than the massive drop in component costs as Chinese manufacturing scaled up, it’s arguably the single biggest factor behind the 12.6-fold and 238-fold increases in US wind and solar output, respectively since 2007.

Last but not least, the rise of natural gas has made the US a net exporter of energy for the first time since the mid-20^th century. That surplus is set to grow in coming years with the expansion of LNG export capacity. And it’s a marked contrast with China, now the world’s heaviest importer of energy and a major customer for US Gulf Coast exporters.

Nonetheless, it’s fair to say that despite these successes, natural gas’ reputation in this country has taken a decided turn for the worse in the 2020s. You’ll still see an occasional vehicle proclaiming it uses “clean burning natural gas.” But the “green” stamp of approval is more and more conferred on all-electric buses and the like alone.

Earlier this year, a Biden Administration trial balloon for a nationwide ban on natural gas stoves quickly lost air. But 100 plus cities around the country have passed restrictions of some sort on gas use. And New York may soon become the first state to enact an outright ban on new natural gas hookups for heat.

Outside of Texas and a handful of oil patch states, construction of natural gas pipelines has basically ground to a halt. Numerous permitted projects, particularly in the eastern US, have been delayed by court challenges until developers cancelled them.

Next to go could be the Mountain Valley Pipeline, which would bring gas from Appalachia to Virginia and the Carolinas. The project is more than 90 percent built and still has public support of the consortium funding it. But with another federal court throwing out a previously granted water permit this spring, work remains suspended with costs rising.

Lack of natural gas pipelines had real consequences for customers’ bills this past winter. New England gas and electric utilities, for example, were forced to import expensive LNG. That spiked gas heating bills as well as electricity, since wholesale power prices tend to track gas. In the Carolinas, Duke Energy relied on energy conservation to avoid Christmas blackouts due largely to inadequate gas supplies.

For the “keep it in the grounders,” thwarting new natural gas infrastructure is well worth those costs. To them, any new investment prolongs usage of fossil fuels additional decades, making it more difficult to achieve CO2 reductions needed to corral the rise in global temperatures. Rather, they advocate all new energy investment be directed to renewable energy, particularly wind and solar.

That’s not a vision shared by the CEO of by far the leading US developer of wind and solar, NextEra Energy, who last month said: “It’s putting your head in the sand to believe that the energy transition that this country is embarking on will work without natural gas power generation.”

But this is a time when issue advocates view the other side as not just misguided but evil, even in arcane spheres like energy where decisions have historically been left to physicists and engineers. And that means US energy investors are increasingly at risk to being caught in the middle—at what I refer to in the current issue of Conrad’s Utility Investor as “regulatory flashpoints.”

As an investor, what’s important is that the companies you own be in sync with the regulators and politicians with jurisdiction over where they operate.

Those that are will be extremely profitable in coming years. Erratic regulators, activist judges and now a restrictive Federal Reserve have discouraged investment in energy supply for nearly a decade. And lack of supply adds up to massive returns for companies that can invest now.

Companies not in sync will face mounting pressure to get in line, with investors likely to bear the brunt of the costs. Encouragingly, Dominion Energy seems to have adapted to Virginia’s 2021 political shift and growing concern about the cost of its offshore wind project. Other companies in similar situations in coming years may not be so fortunate.