importance of reliability will increase. For example, during the winter storm Elliott in December 2022, plant equipment outages accounted for a large share of power supply shortages, followed by securing gas supply.12 As outlined in a previous McKinsey article, “The future of natural gas in North America,” decarbonization policies will likely drive gas-fired generation to average loads of 10 to 20 percent by 2040. This increase may create a need for capacity markets or other mechanisms to remunerate dispatchable gas-fired (peaker) capacity supporting renewables unless more attractive solutions emerge for dispatchable generation and storage. Upstream gas producers: Over the last decade, upstream gas producers have provided US customers with affordable energy and ensured energy supply security both domestically and overseas through LNG exports. If gas is to remain a core pillar of the power generation system, the importance of the reliability of gas supply will only increase. For example, winter storm Uri that hit in February 2021 (which impacted 30 percent of nationwide production mainly in Texas and the Southwest), and winter storm Elliott that hit in December 2022 (which affected 20 percent of nationwide production mainly in Appalachia), have emphasized the need for investments, solutions, and mechanisms to ensure a reliable gas supply, especially during extreme weather conditions. Policy makers and regulators: The role of policy makers and regulators will be critical in establishing the pace of decarbonization and the appropriate market incentives to shape the role of gas to support renewables penetration—such as the provision of flexible dispatch in power generation to compensate for intermittency in solar and wind power. If the power system relies on gas for flexibility, then capacity markets or other mechanisms will be required to ensure that necessary investments are made in the gas system.
Current patterns of compensation for gas assets (such as storage facilities and transport pipelines built for predictable demand at moderate volumes) are not designed for this volatile demand. If these patterns persist, end users will likely be forced to pay for year-round access to a gas supply they may only need a few times a year. Additionally, pipeline operators have proposed peaking services to address some of these issues, which require investments (for example, flexible storage assets or new pipeline connections). However, in the current regulatory environment, investment costs often are not allowed to be passed onto customers. Participants in the natural gas market will need to choose carefully how they approach the conundrum to justify gas infrastructure investments. One option is to continue to offer connection tariffs. The weakness here, however, is that customers will have to pay for infrequently used gas infrastructure capacity. For example, gas infrastructure capacity could be booked on a monthly basis with a fixed reservation charge. Peaking power plants would often not know whether they will dispatched and therefore may find it uneconomic to pay a monthly reservation charge. Another option is to offer customers hourly, pay-as-you-go payment plans, which may require regulatory support and customers’ willingness—such as power generation utilities—to pay high hourly rates for short periods during peak gas demand days (Exhibit 4). Without market mechanisms (and regulatory support) to justify infrastructure investments (for example, secure funding and engineering, procurement, and construction [EPC] contracts), the current challenges of pipeline constraints may become exacerbated with a higher share of intermittent renewables and electrification of energy demand. Power-generation utilities: Gas-fired power generation will be exposed to far greater volatility in seasonal, daily, and intraday load—while the
1 “Winter storm Elliott,” PJM Interconnection, December 2022; PJM Interconnection coordinates the movement of electricity through all or parts of Delaware, the District of Columbia, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, and West Virginia.
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