Natural gas. We have lots of it and extracting it is cheap and easy. It is also a substantially cleaner fuel than coal when burning it for power. So with all the talk as of late about reducing emissions from the power sector, it would appear to be an obvious choice for new power plants. Even without regulations such as the Clean Power Plan (CPP), coal is being pushed out of the stack. For this trend to hold, supply will need to remain robust and prices low. BTU Analytics thinks gas stays cheap for the next handful of years. But the EPA had a different thought when running their models for the CPP.

BTU Analytics wanted to dig into some of the newly released EPA data and see what medium term assumptions and results came from the study. We decided to look at the Electric Reliability Council of Texas (ERCOT), a vast power control area covering the majority of state, and examine the natural gas growth rates the EPA used.

Currently, the Texas generation stack is comprised of 41% gas, 36% coal and 10% wind in 2014. On a capacity basis, the state has 66 GW of natural gas fired generation and 22 GW of coal. Through 2020 there are 10 GW of announced new natural gas plants and only 1.3 GW of coal retirements in the ERCOT region.

In the EPA Base Case, which assumes no CPP, ERCOT gas generation declines by 13,531 GWh/y from 2016 to 2020 representing 285 MMcf/d of demand. The Rate Case, CPP in full force, has gas declining by 18,447 GWh/d which represents 389 MMcf/d. In both scenarios, coal generation notes gains of roughly 25,000 GW/h. BTU Analytics, on the other hand, forecasts (and probably more accurately, we are a fundamentals shop folks) Texas gas consumption in the power sector to increase by close to 0.5 Bcf/d by 2020.

But what is causing these divergences? Well, money makes the world go ‘round and when you dig into the assumptions, it is largely a result of the price of gas. By 2020 the EPA assumes Henry Hub will average $5.20/MMBtu and $5.48/MMBtu in their base case and rate-base scenarios, respectively. The NYMEX forward curve for 2020 is $3.49/MMBtu as a comparison. Further, BTU Analytics is even more bearish in our assessment than the NYMEX forward curve.

In our recent study, A Firm Dilemma, BTU Analytics analyzed Northeast producers and production. The Northeast is the clear source of growing supply in the country and, based on BTU Analytics analysis, there is enough low cost drilling locations remaining in the Marcellus and Utica to only drill wells that breakeven at $2.50/Mcf and below through 2020. Combine this with over 14 Bcf/d of pipeline reversals out of the Northeast headed to the Southeast and a lack of demand outlets until Mexican and LNG exports take hold and you’ve got a bearish environment for some time to come.

So whether you an anti-fracktivist or a coal loving CPP hater, the fact is natural gas supplies are growing and being produced at a low cost. This will further enable combined cycle natural gas plants to compete with coal and supply the nation with low CO2 power. Thanks economics.