In recent years, the power sector has emerged as the only significant consumer of natural gas in the United States to show consistent growth. As demand from other sectors declines, the power industry has become the primary driver of natural gas consumption. Over the past three years, the use of natural gas by power generators has expanded by approximately 3.5% annually, making it the largest single source of gas consumption in the country, according to data from LSEG.
Despite this growth, the volume increase in natural gas usage by the power sector has been overshadowed by reductions in other sectors. In 2023, power companies’ gas consumption grew by 70 billion cubic feet per day, while combined usage by industry, households, and commercial users fell by 114 billion cubic feet per day. Power firms accounted for roughly 44.4% of total domestic gas consumption in 2023, compared to 29% by industry, 15.5% by households, and 11% by commercial users.
The demand for natural gas in the industrial sector has declined by around 0.3% annually over the past three years, while residential and commercial gas usage has decreased by 0.5% and 0.7% per year, respectively. This increasing concentration of gas use in the power sector raises potential risks for the U.S. gas production industry, particularly if rapid decarbonisation efforts in power generation lead to a swift decline in gas demand, as other major consumption sources are already diminishing.
The reduction in gas usage outside power generation is largely due to the widespread electrification of heating and power systems in homes and businesses. Electricity-powered heat pumps and boilers have increasingly replaced gas-fired furnaces, though the rate of heat pump sales has slowed due to high electricity prices and interest rates. In 2022, a record 4.3 million heat pumps were sold in the United States, marking the first time their sales exceeded those of gas-powered furnaces. However, sales slowed to 3.6 million units in 2023, with 1.564 million units sold by May 2024, slightly down from the same period in 2023.
Although heat pump sales have slowed, their cumulative impact on gas demand continues to grow, as each unit displaces some level of direct gas consumption. However, quantifying the exact volume of natural gas displaced by heat pumps is challenging, as most industry assessments focus on cost savings rather than reductions in fossil fuel use. Additionally, many heat pump installations shift energy consumption from on-site gas burning to electricity supplied by power companies, making it difficult to determine the net effect on overall gas use in the United States.
High-level data, however, reveals clear trends. During the first half of 2024, total U.S. natural gas consumption increased by 2.3% compared to the same period in 2023. Gas demand from power producers rose by 5.2%, while demand from other major users increased by only 0.5%. Among non-power sectors, industrial gas usage grew by 3.1%, while residential and commercial demand decreased by 2.5% and 1.2%, respectively. These divergent trends suggest that gas consumption among non-power users may be nearing its peak, while demand in the power generation sector continues to rise.
Over the past five years, the power sector’s reliance on natural gas for electricity generation has steadily increased. In 2023, natural gas accounted for 42.41% of utility-scale electricity production, up from 35% in 2018 and 24% in 2010, according to energy think tank Ember. This growing reliance on natural gas has coincided with a significant decline in coal’s share of U.S. electricity generation, which fell from 45% in 2010 to 16% in 2023. Meanwhile, electricity generation from renewable sources like solar and wind has expanded, reaching 15.6% in 2023.
The power sector’s continued use of natural gas for electricity generation seems likely, as gas plants can be easily adjusted to meet fluctuations in power demand and to compensate for shortfalls in renewable energy production. However, as more energy end-uses become electrified and overall power consumption increases, the outlook for natural gas production remains positive in the near to medium term.
Nonetheless, the ongoing concentration of gas demand within the power sector poses a potential long-term risk. Several utility systems are planning to phase out gas-fired generation in favour of renewable energy combined with battery storage systems. Although current battery systems are too small to significantly impact gas demand, continued rapid growth and cost reductions in utility-scale batteries could eventually challenge natural gas’s dominance in power generation, particularly if other gas consumption sources also decline. Should this scenario materialise, a major surplus of natural gas could develop.
Diversified Energy Company plc (LON:DEC) is an independent energy company engaged in the production, marketing, transportation and retirement of primarily natural gas and natural gas liquids related to its U.S. onshore upstream and midstream assets.
