Exhibit 4 New market mechanisms will be needed to allow gas suppliers to meet peak-day demand.
Power market change Gas market change
Change to gas and power market
Minimal change
Substantial change
Require firm transportation (FT) for gas generators
Maintain current G&P contracting structure • Continue operating gas and power markets under current standard contracting practices
Hourly gas prices
Option based pricing
Potential option
• Offer gas supply on a dynamic hourly basis
• Require generators to have FT to participate in power capacity markets
• Variable cost gas supply that changes based on market conditions (for example, pay less during normal conditions but pay a premium during a price fly-up) • Getting power and gas players to agree to terms when higher prices are permitted may be difficult • More variable revenue (pipeline) and costs (power)
Additional considerations
• Pipeline revenue becomes highly volatile • Power generators and regulators may be cautious to pay potentially thousands $/mmbtu for a few hours of gas access
• May increase power costs • Power generators and regulators may be unwilling to pay for year-round gas access when it is required infrequently
• Power generators may be unwilling to pay for year-round gas access when it is required infrequently
Note: To meet higher peak-day gas demand in a renewable-dominant power grid, additional infrastructure (such as pipelines and underground storage) will be required.
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through affordable and reliable grid balancing. To do this, the gas system must be ready to deliver high volume on peak-demand days when renewables cannot generate at full capacity—this will require the introduction of market mechanisms and infrastructure not in place today.
With the right regulatory and infrastructural changes, natural gas can play a key role in decarbonizing the US power supply in the coming decades, supporting the accelerated rollout of intermittent renewables
Jamie Brick is a consultant in McKinsey’s Houston office, Dumitru Dediu is a partner in the Boston office, and Jesse Noffsinger is a partner in the Seattle office. The authors wish to thank Adam Barth, Anton Derkach, Yuliya Olsen, Micah Smith, and Humayun Tai for their contributions to this article.
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