A gas procurement incentive mechanism that provides strong incentives for a broad range of procurement-related costs and revenues, using a benchmark that is both exogenous and adaptive to external...
The Late Great Gas Utility
By abandoning R&D and marketing, the gas industry may have sealed its own fate.
Once upon a time, there was a happy energy industry in the United States that served every market sector—residential, commercial, industrial, and power generation. This industry provided the country’s dominant fuel, and faced a promising future of endless profits.
Then three things happened: regulatory pressure; the emergence of competitive fuels; and what appeared to be an easy path forward to secure the industry’s fortunes—namely, continued demand from the power sector.
The fuel producers liked the last part, and focused most of their attention on satisfying the electricity generation market. Meanwhile, fuel distributors, no longer being supported by producers, decided one by one not to fight as hard as they previously had for the residential, commercial and industrial market. Eventually most of that market was lost, leaving the producers reliant on electricity generators.
This wasn’t a happy ending for the distributors, and, as it turned out, not a happy ending for the producers either. Because the electricity generators eventually found better, more economic alternatives, and that fuel’s share of the power generation market began to decline—leaving the industry scrambling.
This parable—more or less—describes the history of the coal industry in the U.S. But it could just as well describe what is happening to the natural gas industry today.
Every segment of the U.S. natural gas industry benefits when natural gas demand grows. 1 However, the focus of the natural gas producers and local gas utility companies differ. The gas utilities primarily are interested in growth in the residential, commercial and industrial markets. 2 Natural gas producers are more ecumenical. They are interested in growth in all markets—but especially electricity generation, which uses a substantial amount of gas at each site. The interstate shippers tend to be agnostic as long as their pipes are full—although as with the producers, they like large volumes demanded from as few customers as possible. Unfortunately, the demand for gas in residential, commercial and industrial markets is declining—as demand for coal did more than 50 years ago—and the gas industry, in general, has not been doing much to address that situation. Unless this can be turned around, demand in these markets will continue to decline until the industry becomes overly dependent on the electricity generation market.
For gas utilities, this would be a death spiral—but it might not be much better for gas producers. Producers who hope the electricity generation market will continue compensating for declines in other markets may be sorely disappointed.
First, non-power markets represent almost three-quarters of natural gas consumption. That’s a lot to compensate for. But more important, for gas producers to put all their eggs in one basket would be a very risky strategy. As the coal industry is fond of saying, “America is the Saudi Arabia of coal.” Today, government and the coal industry