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Storage Surge

New gas projects help globalize the U.S. market.

Fortnightly Magazine - April 2008

Bcf/ day due to this new generating capacity.

With a sharp rise in natural gas prices and a growing recognition that many power markets were overbuilt, the merchant power boom ended in 2002.

During the next several years, natural gas was out of favor as a power generation fuel. But in many regions of the country this appears to be changing.

Increasingly, carbon regulation appears to be a matter of timing. R.W. Beck studies show a price of $30 to $50 per ton of CO 2 would lead to up to 50,000 MW of additional natural gas-fired capacity being built. Under higher tax scenarios, traditional coal power capacity will lose out to natural gas capacity, and eventually advanced clean coal and nuclear technology (see Figure 4) .

An increase of 50,000 MW of natural gas-fired capacity could boost demand by up to 2 trillion cubic feet per year, and increase average Henry Hub natural gas prices by 20 to 25 percent (see Figure 5) . However, the exact timing and level of this demand push from carbon regulation remains subject to a large degree of uncertainty.

Meanwhile, throughout the United States a dramatic increase of renewable power sources—mainly wind and solar—is underway, in large part in response to state level mandatory renewable portfolio standards (RPS). Some form of RPS are in place in many states, and the amount of power consumption covered by these states is about half of total U.S. power demand. Even without federal mandates for RPS it is clear that wind and solar capacity will continue to increase around the country.

These renewable resources might create a further reliance on natural gas-fired capacity, to firm up variable generation and ensure grid reliability and stability. An important consideration is that little of the installed renewable power generation can be considered capacity.

For utilities to meet reserve margin goals and reliability standards, many will need added dispatchable generation resources—with the choice clearly in favor of natural gas-fired capacity. Given the growing contribution of imported LNG to fuel these plants, gas storage capacity will serve an increasingly important role in enabling gas markets to meet the challenges of a changing power industry.

Fuel Flexibility

The U.S. natural gas industry is becoming more complex, with more uncertainty and weather sensitivity affecting both natural gas supply and demand. These trends strongly suggest higher levels of price volatility in the future. A massive increase in high performance gas storage is both the response to this expectation and a necessary tool to adapt to it.

The current wave of gas storage development represents the next step in the transformation of the gas storage industry from its historically relatively isolated role into a highly flexible role—integral to the global LNG market, U.S. electricity markets, and overall U.S. energy security.

For traders and marketers, the ability to capitalize on natural gas price volatility has been the primary driver for the recent wave of interest in natural gas storage. In the longer term, gas storage likely will be valued for its traditional and increasingly critical purposes—supply assurance, reliability and