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Electricity Demand Failing to Provide Spark for Natural Gas

While many of the new natural gas pipelines in the US market are underpinned by producers, several projects have been driven by utility forecasts of electricity demand growth and conversions of coal-fired power plants to natural gas. For instance, the proposed 1.5 Bcf/d Atlantic Coast Pipeline has Duke Energy as the primary shipper and is designed to serve the Virginia and North Caroline natural gas markets. But what happens when utilities lower their electricity demand forecasts?

In April 2016, we highlighted how the correlation between US electricity demand and US GDP growth had broken down in Will Historical Assumptions Blindside Power Burn Bulls. In addition to slowing electricity demand growth, utilities and customers alike have increasingly turned to renewable generation capacity in 2015 and 2016. The below slide from the Solar Energy Industries Association highlights that over 4,000 MWdc of new residential, commercial, and utility capacity was added in the first two quarters of 2016 alone.

While Trump may try to bolster coal demand, renewable generation will continue to play a key role in electric load planning. In addition to renewable generation, utilities need to account for long term changes in population, customer counts, and electricity demand from their customers. As peak demand theorists speculate on the outlook for crude oil, peak electricity demand may have already occurred in some US electricity markets and the outlook in the Florida market has seen some strong downward revisions in recent years amid stagnant load growth. The slide below was created utilizing data provided by Florida Power & Light to the Florida Reliability Coordinating Council as part of their ten year power plant site plans.

Every year, each utility in the state of Florida is required to provide a forecast of future electricity consumption as part of the planning process for developing electricity infrastructure in the state of Florida. The above graphics highlights the differences in the Florida Power & Light (FP&L) forecasts in 2015 to 2016. In the 2016 electricity demand forecast, FP&L made no significant changes in customer counts, revised population growth estimates up, but drastically lowered its expected consumption of electricity per customer down in 2016 relative to 2015 on empirical evidence that consumers were bucking the expected trends of increased electricity usage compliments of energy efficiency and tighter building codes among other things. The resulting change in usage per customer wiped out nearly 11% of the expected electricity demand increase by 2024.

While the outlook today from FP&L and the other utilities in Florida continue to indicate continued growth in natural gas-fired generation, the revisions from FP&L pushed some of the planned new natural gas-fired generation in-service dates into the future, and in addition FP&L added utility scale solar plants to the plan in 2015 and 2016, suggesting electricity demand for natural gas may not grow as aggressively as some think in some markets.

To hear more about BTU Analytics’ views on natural gas demand, join us at our annual What Lies Ahead 2017 conference in Houston on February 8, 2017.

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Anthony (Tony) Scott has built an in depth understanding of the North American energy market by providing investment advisory services and leading teams of analysts focused on the North American energy complex. Mr. Scott has conducted hundreds of consulting engagements assisting producers, marketers, midstream, refiners and private equity understand how rapidly changing natural gas, natural gas liquids, and crude oil markets in North America would impact their assets.

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