Across the United States, renewable energy sources are impacting natural gas generation. The growth of renewables in the grid, compounded by the increased electrification of energy demand, will expose the grid to the risks of an intermittent renewables supply to meet growing power demand.
As a result, in the coming decades, a fully “dispatchable” backup energy supply will be required to ensure the reliability of the power grid for multiday swings. In the absence of breakthroughs in long-duration energy storage, natural gas—which can be implemented at scale—could be the cheapest and lowest-carbon candidate for this role.
Demand for gas is expected to be more volatile going forward—lower on average, but potentially much higher on peak-demand days when intermittent renewables are at low generation levels. However, today’s gas system was not designed and sized to deliver the high gas volumes that will be needed on these peak-demand days in the future. Infrastructure upgrades and new market mechanisms will likely be required to position mainstream gas operators to provide the natural gas that consumers will need.
Natural gas’ track record in decarbonizing the power sector over the past decade
Since 2005, the United States has reduced its energy-related CO2 emissions by about 18 percent.1 A switch from coal to natural gas accounts for a significant portion of this reduction. According to the US Energy Information Administration (EIA), the use of natural gas in the electric power sector increased by more than 100 percent between 2005 and 2022, while coal use declined by about 55 percent.2
This shift from coal to natural gas for power generation resulted in an estimated reduction of 532 million metric tons in CO2 emissions over the same period.3 This has been the most significant decarbonization lever, mitigating the equivalent of more than 10 percent of 2021 US greenhouse gas (GHG) emissions. This is more than double the mitigation of approximately 248 million metric tons of CO2e (carbon dioxide equivalent), which can be attributed to the increase in renewable generation.4
Moving forward, the United States has the opportunity to increase the decarbonization impact through natural gas, alongside other power supplies, by continuing coal-to-gas switching, implementing carbon capture and storage (CCS) solutions on existing and future gas-fired power installations, supporting blue hydrogen production, and accelerating the rollout of intermittent renewables beyond the level of 13 percent of power generation in 2021.5 In addition, natural gas exports from the United States can support energy supply security and decarbonization efforts overseas—for example, in Europe through coal-to-gas switching and enabling the accelerated rollout of renewables and new energies (such as the hydrogen economy).6
The electrification of energy demand and the growth in renewables
A major trend in the energy transition is the electrification of energy demand. The greater the electrification of end-use energy needs, the higher the importance of the energy supply reliability to meet growing power demand.
To illustrate, the electrification of road-based transportation is currently taking place by replacing internal combustion engine (ICE) vehicles with electric vehicles (EVs), the electrification of household heating is occurring through heat-pump adoption, and the electrification of industrial processes is happening through the electrification of low-temperature heat.
To meet US decarbonization goals, this higher electricity demand must be met with a clean power supply. Power-supply decarbonization can be achieved with a higher share of renewables in the grid (for example, solar and wind), alongside other low-emitting energy sources—such as nuclear, hydroelectric power, or gas-fired power generation with CCS.
In virtually every decarbonization scenario and each independent system operator (ISO) in the United States, the share of renewable generation is expected to increase and coal generation is expected to decrease. Renewable growth is supported by federal policy and state-level decarbonization goals. At the federal level, the Inflation Reduction Act of 2022 directs roughly $400 billion in federal funding to renewables, also lowering carbon emissions by providing decarbonization incentives for operators throughout the energy value chain.7 Parallel to this, individual US states have set ambitious targets to achieve substantial decarbonization, with 22 states (representing around 45 percent of the US population) already having deep decarbonization targets of 80 to 100 percent by 2040 or 2050.8
There is no doubt that many challenges will need to be resolved to substantially increase renewables supply. For example, regulations around land access will need to be updated—especially around densely populated areas—to provide the land required for renewables. Solar requires roughly 10 to 20 times more land than gas, and onshore wind up to 200 times more, to generate the same amount of electricity.9
Overall, significantly larger investments will have to be made in the power grid to support the rollout of renewables. This could amount to an increase in investment of five to ten times historical levels.10 In addition, supply chain constraints and other factors, like the availability of craft labor, may lead to cost increases and delays in renewables projects.
Depending on the degree to which the renewables industry manages to address these challenges, the share of renewables in power generation may range from very low (15 percent solar and wind by 2040 in the “current trajectory” scenario as laid out in McKinsey’s Global Energy Perspective 2022) to very high (70 percent solar and wind by 2040 in the “achieved commitments" scenario) (Exhibit 1).
Across all scenarios, however, gas-fired power generation will play an important role: in a “less-renewables” scenario, gas-fired generation will be needed to meet higher electricity demand as renewables scale up; in a “more-renewables” scenario, gas-fired power generation can provide affordable and dispatchable power supply to balance out the intermittency of renewables.
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Decarbonizing the grid with a large share of renewables comes with reliability challenges
Decarbonizing the US power supply with solar and wind generation entails the challenge of an intermittent supply that cannot reliably match power demand, especially the multiday variability of this demand.11 The higher share of electrified energy demand implied by decarbonization will make reliability in the grid even more important, as electricity will be needed for residential heating and critical industrial processes.
There are several options for securing a reliable and dispatchable power supply in a decarbonized grid to address multiday variability (Exhibit 2). While various long-duration energy storage (LDES) solutions may be economic in some geographies to provide electricity during multiday periods of low renewable generation, natural gas is consistently the most reliable and cost competitive—even after accounting for carbon costs.
Natural gas generation is known as a “dispatchable” energy source, meaning that the facilities for natural gas generation can be switched on or off depending on need—demonstrating its suitability as a security supply for the grid.
The natural gas system needs to be built out to deliver on peak-demand days when renewables cannot generate at full capacity
To ensure that dispatchable gas-fired power generation can be used to complement renewables, the supply of natural gas to power plants must be robust enough to meet demand on peak days—occurring when solar and wind generation are low for multiple consecutive days.
The need for natural gas in a transition to renewables: A case study
To meet decarbonization goals, New York (NY) and New England (NE) ISOs are starting to replace natural gas with renewable generation as a power source. From 2021 to 2040, gas generation is expected to decrease with a CAGR of 6 percent, while renewable generation grows with a 1 percent CAGR. Although gas accounted for over half of NY’s and NE's power generation in 2021, by 2040, renewables would contribute the bulk—around 75 percent (exhibit).
Despite this shift from gas to renewables and the ultimate drop in annual gas generation, demand for gas on peak days—when renewables generate below full capacity—could increase, especially in the absence of other dispatchable energy supplies that can be ramped up to meet power demand. In 2021, peak-day gas demand in NE and NY reached up to 6.6 billion cubic feet per day (bcfd) above the average annual gas demand. By 2040, peak-day demand in NE and NY could quadruple the annual demand, with an 11.5 bcfd difference.
Natural gas, therefore, will remain essential to the grid in NY and NE, as in the rest of the country. This poses a challenge for natural gas providers and consumers—how best to organize and regulate access to an emergency supply of natural gas?
To ensure grid reliability, access to gas will be needed. And this, in turn, will require new infrastructure to be developed (such as pipelines and gas storage). Providing—and paying for—this infrastructure requires a change in how the gas and power market currently operates; new market mechanisms will have to be introduced to allow full access to the natural gas market.
In deeper decarbonization scenarios, this will lead to a lower average annual gas demand volume, with higher peak-day gas demand. The need for dispatchable power will likely vary by region—with some regions relying much more on gas-fired power generation than others depending on the availability of attractive renewable generation, such as solar and wind (Exhibit 3) (see sidebar, “The need for natural gas in a transition to renewables: A case study”).
New market mechanisms and gas infrastructure investments will be needed to bridge the gap
The natural gas infrastructure in North America—pipelines and storage facilities—has grown over decades to transport gas based primarily on long-term, take-or-pay contracts between pipeline operators and customers (typically gas marketers or large buyers, like utilities or industrial companies) that pay a reservation charge (or tariff) for capacity.
In the coming decades, the capacity of the natural gas system will have to be increased to allow it to deliver on peak-demand days when renewables cannot generate at full capacity, even in areas currently not impacted by insufficient pipeline capacity. However, expanding this gas infrastructure capacity and maintaining the existing gas infrastructure will require new investments, though the capacity will be utilized at a much lower rate. The regulatory and market mechanisms that will support such investments are the key unlocks in this regard.
Addressing this challenge requires collaboration across the entire value chain—gas producers, pipeline operators, utilities or power producers (PPs), ISOs or regional transition organizations (RTOs), and policy makers—and a recognition that the solution needs to balance out the three imperatives of decarbonization, affordability, and reliability.
Pipeline and storage operators: These operators in particular will be affected by this. Together, lower average gas demand and the costs of increasing gas infrastructure capacity pose a unique challenge for pricing the delivery of midstream gas services to customers.
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 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.
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 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.
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