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Growing Solar Capacity Threatens U.S. Natural Gas Demand

Economics

By Connor McLean  |  October 26, 2021

Fears of an impending energy shortage this winter have led to some of the strongest energy commodity prices in years with West Texas Intermediate (WTI) crude exceeding $80/bbl and Henry Hub natural gas over $5.50/MMBtu. While growth in U.S. renewables won’t be able to relieve the energy shortage this winter, an energy crisis could accelerate a transition to green energy sources leading to long-term demand destruction for domestic gas generation. New investment in renewables would build on what has already been a substantial increase in proposed solar projects in the past year. Here we examine new solar project announcements and their potential impact on U.S. natural gas demand.

BTU Analytics’ Power View service tracks new generation capacity announcements and assigns a BTU Grade to quantify the risk a project will come to market. Over the past four quarters, 113 gigawatts (GW) of new solar capacity has been announced, bringing total planned solar capacity to just under 300 GW (incremental to already operational solar capacity). However, a large portion of that proposed capacity is speculative with little chance of making it to market. Limiting capacity announcements to just projects with a BTU Grade of 3 and above (those assessed as more likely to come to market), approximately 25 GW of new solar capacity has been added to the project list over the last 12 months.

cumulative-solar-capacity-by-btu-grade

Perhaps unsurprisingly, Texas and the Western U.S. make up the vast majority of recent solar project announcements. Not only do these regions generally have higher average capacity factors than the rest of the U.S., but they also have the most open land allowing for larger proposed projects. However, when limiting projects to those with the least risk, the Midwest and Northeast have seen the largest increases in proposed capacity over the last year.

Using the average 12-month capacity factor for each ISO region, the increases in proposed solar capacity can be converted to natural gas equivalent generation to estimate the impact on domestic gas generation. Since the end of 3Q20, approximately 1 Bcf/d of new solar capacity with a BTU Grade of 3 or above has been added to our project list. If expanded to include all speculative projects, that number balloons to 4.9 Bcf/d of incremental solar generation. While 4.9 Bcf/d is unrealistic, 1 Bcf/d of new solar capacity represents a 27% increase in solar capacity that could come online by the end of 2026.

natural-gas-equivalent-generation-by-iso-region

As renewables continue to grow, the impact of renewables in the generation mix and on domestic natural gas demand will be increasingly important.

BTU Analytics is a FactSet Company. This article was originally published on the BTU Analytics website.

The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.

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Connor McLean

Energy Analyst, BTU Analytics, a FactSet Company

Mr. Connor McLean is an Energy Analyst at BTU Analytics, a FactSet Company. In this role, he focuses on natural gas modeling and research. Prior to joining BTU Analytics, Connor held internships with Total and EDF Trading, building models to analyze pricing trends in the natural gas and power markets. Mr. McLean holds a B.S. in geology and a master’s degree in financial management from Texas A&M University.

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