Research Triangle Energy Consortium

Ukraine shut down the natural gas pipeline from Russia to southern Europe yesterday.  While not unexpected, yet another red rag for natural gas bulls. And ascendency for liquefied natural gas (LNG) futures and associated increase in US influence on Europe because, according to the Energy Information Administration, most of new LNG supply in the world will be from the US.  Of course, that means more fodder for the debate in the US on whether LNG exports will increase domestic prices more than mere price elasticity with demand. I see greater demand impact from a different source, but more on that below.

Natural gas usage will not be in decline anytime soon. In fact, usage will steadily increase for the next couple of decades. Much of the incremental usage will be for electricity production, with a business model twist: expect a trend to captive production “behind the meter”. Not having to deal with utilities will speed introduction. Of course, the entire production will have guaranteed offtake, but that will not be much of a hurdle for some of the deep pocketed applications owners.

So, what has changed? Why are fossil fuels not in decline in preference to carbon-free alternatives? Much of the answer is that all fossil fuels are not created equal. Ironically, oil and gas are created by precisely the same mechanism, but their usage and the associated emissions are horses of different colors. At some risk of oversimplification, oil is mostly about transportation and natural gas is mostly about electricity and space heating.

At a first cut, oil usage will reduce when carbon-free transport fuel alternatives take a hold. Think electric vehicles, methanol powered boats, biofuels for aviation and so forth. Similarly, natural gas usage reduction relies upon rate of growth of carbon-free electricity (note my use of carbon-free instead of renewable), which today is almost all solar and wind based.  Advanced geothermal is nascent and nuclear is static except for some rumblings among small modular reactors (SMRs).

In the case of oil in transportation, when the switch to battery or hydrogen power arrives, oil will be fully displaced from that vehicle. Not counting hybrids in this discussion, nor lubricating oils. In electricity, however, solar and wind power being intermittent, some other means are needed to fill the gaps. Those means are dominantly natural gas powered today for longer duration (greater than 10 hours). For short durations, and diurnal variations, batteries get the job done for around 2 US cents per kWh. Very affordable, and unlikely to change. To underline the point, solar and wind need natural gas for continues supply. Until alternatives such as long duration storage, geothermal or SMRs make their presence felt, every installation of solar or wind increases natural gas usage.

As if that were not bad enough, a recent complication is increasing electricity demand. Artificial Intelligence, or AI, and to a greater extent the Generative AI variant, has increased electricity demand dramatically. For example, a search query uses 10 times the energy when employing Gen AI, compared to a similar conventional search. The information is presumably more useful, but the mere fact is that these searches and other applications such as in language, are power hogs.  The data center folks are trolling for power in geothermal and nuclear. Microsoft went so far as to commission the de-mothballing of the 3 Mile Island conventional nuclear facility. Control room picture shows its age. The operators will face what an F18 pilot would, if asked to fly an F14 (apologies, just saw Top Gun Maverick film).

Almost all the big cloud folks want to use carbon-free power, 24/7/365. Good luck getting that from a utility.  Some, such as Google with Fervo Energy geothermal, are enabling supply to the grid and capturing the credit. Others are going “behind the meter”, meaning captive supply not intended for the grid. The menu is geothermal, SMRs and innovative storage systems. All have extended times to get to scale.  Is there an option that is more scalable sooner to suit the growth pattern of AI?

Natural gas. A combined cycle plant (electricity both from a gas turbine and from a later in cycle steam turbine) could be constructed in less than 18 months. Carbon capture is feasible, even though the lower CO2 concentrations of 3 to 5% (as compared to 12 to 15% for coal plants) makes it costlier (a reason I am bearish on direct air capture, with 0.04% concentration). At the current state of technology, I estimate that will add 3 to 4 cents per kWh. This technology will keep improving, but that number is already worth the price of admission, at least in the US, where the base natural gas price is low. Not renewable, but nor is nuclear. You see why I prefer the carbon-free language?

To be behind the meter, the plant would need to be proximal to the data center. Data centers prefer cool weather siting for ambient heat discharge. Reduces power usage. Since natural gas pipelines serve a wide area, this ought not to be a major constraint. However, it could favor producers in the northern latitudes, especially if a rich deposit is currently unconnected to a major pipeline. Favorable deals could be struck especially with long term offtake contracts in part because the gas operator will eliminate the markup by the midstream operator. These conditions could be met in Wyoming, Alberta (Canada) and, of course, Alaska.

We used to refer to natural gas as a bridge to renewables, until that phraseology fell out of vogue. The thinking was that gas could replace coal to provide some CO2 emissions relief (and it did that for the US), and eventually be replaced by renewable energy. The model suggested above does not fit that definition. Those plants will likely not be replaced because they would be essentially carbon neutral. And they would enable a powerful new technology the foundations of which already have been awarded the 2024 Nobel Prize in Physics.  Gen AI may well lose some of its luster, but the machine learning underpinnings will survive and continue to deliver. All that will need data crunching. More data centers are firmly in our future.

Those that are still inclined to teeth gnashing on emissions from natural gas production ought to ponder nuclear spent fuel disposal, mining for silica for solar panels and the problem with disposal of disused wind sails, to name just a few.  Every form of energy has warts*. We simply need to minimize them.

Vikram Rao    

January 2, 2025

*Every rose has its thorn, from Every Rose Has Its Thorn, 1988, performed by Poison, written by Brett Michaels et al.

Tagged: energy, renewable-energy, solar-power, sustainability, wind-power