ISO Markets Continue to Expand, Part I

by Bob Shively, Enerdynamics President and Lead Facilitator

For the last 20 years, it appeared North America was locked into two paradigms on wholesale market design:

  • Less competitive unorganized markets centered around vertically integrated utilities, bilateral trading, and transmission wheeling services
  • Organized competitive markets run by an Independent System Operator (ISO)[1]

It’s becoming increasingly clear that organized competitive markets are the winning paradigm. Some regions such as the U.S. Southeast and Canadian provinces dominated by vertically integrated utilities are still holding out, but large markets continue to join or are on the verge of joining ISOs. And as use of renewable generation grows and dependence on baseload units fades, the benefits of ISO participation are becoming clear.

This week we’ll look at the recent history of organized market growth and the short-term future of such growth. We’ll continue the discussion next week with a look at why organized markets are winning out and what the long-term future may hold for North America’s organized market structure.


North American regions with organized ISO Markets as of 2017

2017 ISOs N America.png



Organized markets have grown substantially in the last five years

In the last five years, we have seen the following:

  • 2013 – Ten transmission companies from the south, including various Entergy utilities and CLECO, joined the Midcontinent ISO (MISO).  This added territory across parts of the states of Arkansas, Louisiana, Missouri, Mississippi, and Texas to the ISO that formally operated solely in the mid-west.
  • 2014 – The Western Energy Imbalance Market (EIM) was launched by PacifiCorp becoming a participant in the California ISO (CAISO) real-time market.   This meant that generation assets across parts of seven western states became available for real-time cost-based dispatch.  Subsequently, Arizona Public Service, NV Energy, and Puget Sound joined. Seven more entities including Powerex in British Columbia plan to join between now and 2020, and part of the Mexican grid in northern Baja California is studying participation as well.
  • 2015 – The Southwest Power Pool (SPP) added the Upper Great Plains region including parts of Iowa, Montana, Minnesota, Nebraska, North Dakota, and South Dakota.  Much of this system was previously operated by the Western Area Power Administration and this expansion marked the first time a federal power agency had joined an ISO.
  • 2016 – Mexico implemented electricity reform including creation of Centro Nacional de Control de Energía (CENACE), a country-wide ISO running day-ahead and real-time markets.

Organized markets are poised to grow significantly more in the near future

It doesn’t appear that growth in organized markets will slow anytime soon. PacifiCorp and CAISO are working toward PacifiCorp becoming a full member of CAISO. If it comes to fruition, it appears that other utilities may soon follow. Efforts continue to develop CAISO into a full western regional electric market. And recently, the Mountain West Transmission Group, comprising eight utilities and two WAPA divisions, announced a non-binding letter of intent to hold detailed discussions with SPP. SPP reportedly was selected after consideration of CAISO or PJM as possible partners. The entities could join as soon as 2019.

WAPA map.pngSource:  WAPA website


Next week we’ll continue this look at ISO expansion and answer two key questions:

  1. Why the movement to organized markets? 
  2. Will all of North America become an organized market?


[1] In this blog we are using the term ISO as a synonym to a Regional Transmission Organizatoin or RTO

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When Will the U.S. Natural Gas Market Turn?

by Bob Shively, Enerdynamics President and Lead Facilitator

Natural gas prices in North America are closely watched by industrial corporations, electric generators, marketers, gas utilities, and now even international marketers and consumers of natural gas. These prices have remained historically low despite various factors that could work against them including the expansion of markets for U.S. gas to include exports to Mexico, exports worldwide via LNG, and gas-fired units’ dominance as an electric generation source in the U.S. Will low prices be a long-term phenomenon, or are we nearing a tipping point that will result in a rapid price increase?

As Enerdynamics Instructor Belinda Petty wrote in a 2013 Energy Insider article:

“In North America, natural gas is a commodity whose price is driven by fundamentals. The value of natural gas, or price level, is determined by the perception of the supply and demand picture. Long supply, meaning suppliers are producing more supply than required by market demand, pushes prices down since buyers are able to negotiate price among multiple suppliers who need to sell for cashflow. Short supply means that production is equal to or less than demand. This results in buyers bidding up the price so they can get supply before another buyer does.” 

Key fundamentals include perceptions of current and future supply/demand balances:

Supply Demand
Current production levels Weather forecasts
Current gas reserves Business activity
Gas in storage Storage injections
Imports available Alternate fuel prices
Transpotation capacity Electric generation market
  Potential export volumes

For future prices, additional factors include:

Supply Demand
Rig counts Forecast growth in gas-fired electric generation
Drilling efficiency Forecast growth in other demand sectors
Forecast production levels Capacity for pipeline and LNG exports including new planned projects
Capacity for pipeline and LNG imports Economics of pipline and LNG exports
Economics of pipeline and LNG imports Long-term weather changes


Gas prices have historically been volatile but seem less so now

 HH First of Month

Historically gas prices have changed quickly with large fluctuations in pricing levels. But since the emergence of consistent shale gas production early in the current decade, prices have stayed within a historically low range of $2 to $4 except during extreme winter weather events. And looking at the future price curve, it is the current expectation of the market that prices will stay in that range through 2024.

CME Group HH Natural Futures


Why are prices expected to be so low?

According to the 2017 EIA Annual Energy Overview, U.S. demand for natural gas  in 2024 (including demand for exports) is expected to be 20% higher than 2016 levels:

Natural gas demand

Meanwhile, natural gas rigs in operation are at very low levels relative to historic numbers:

U.S. Natural gas rotary rigs

Of course what isn’t being shown here are the dramatic productivity improvements by gas exploration and production companies that translate to significantly more gas per well drilled. Indeed, while rig counts have fallen, gas production has risen:

U.S. Dry natural gas production


So if rig counts and demand/export growth suggest that prices should rise, why aren’t they? Clearly the current market has a strong belief in the ability of gas producers to continue to efficiently pump out new gas supplies. Until that belief changes, we can expect continued low prices except during extreme weather conditions.

Want to learn more about gas markets? Enerdynamics offers Gas Market Dynamics as an online course or as a live seminar for groups. Call 866-765-5432 ext. 700 or email for more details.

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Is the Value of Demand Response Growing or Declining? Depends on Where You Look

by Matthew Rose, Enerdynamics Facilitator and Director at EMI Consulting

The value and business rationale for demand response (DR) varies depending on where Concept for spend on electricityyou look. In certain parts of the country, there seems to be a growing focus on DR; in others, market forces are reducing the value of DR. In some areas DR is viewed as a resource competing in capacity markets whereas in others it is a resource included in utilities’ integrated resource planning.

  • In the Pacific Northwest, the focus has traditionally been only on energy efficiency, but the current 20-year power plan prepared by the Northwest Power and Conservation Council indicates demand response could offer billions in cost savings.
  •  In California, the state’s Investor Owned Utilities (IOUs) now participate in the state’s Demand Response Auction Mechanism (DRAM) program.
  • DR also is unfolding in the Northeast with both utility and ISO programs.

Despite new areas of DR attention, there are signs that activity levels are tapering off in some of the more mature markets. A review of the current market for demand response points to a fragmented landscape affected by varying aggregator activities, changing market rules, and a capacity market that has notable swings in capacity requirements and value. The Regional Transmission Organization or RTO known as PJM Interconnect (which provides system operations in 13 Mid-Atlantic and Midwestern states) is one example of such. Here’s a closer look:

The status of demand response by looking at PJM

PJM is a key place where demand response has been a viable resource. Over the past decade, PJM has successfully facilitated markets open to DR resources including its energy, capacity, and ancillary services markets. However, despite continued market activity, PJM has seen some recent reductions in DR market impacts. This is especially evident in the commitment of DR in its forward capacity market, which remains the most heavily transacted of PJM’s DR markets and accounts for more than 90% of PJM’s DR revenues.

A key metric that looks at participation of DR in the PJM Interconnect is the results of the just-completed Basic Residual Auction (BRA). The auction saw significant declines in capacity prices across most of PJM’s market for the 2020-2021 delivery year with resources clearing at $76 MW-day across most of the grid (as compared to last year’s auction where most of the grid cleared at around $100 MW-day).

Successful DR in PJM

The BRA auction directly reflects the impact of DR in PJM’s forward capacity market. Demand response as a resource continues its trend of decline over the past few years. Some experts point to changes in PJM’s auction rules that require year-round operation of resource reduction as part of its Capacity Performance construct. This was seen as particularly challenging for DR resources that traditionally focused on summer months when prices and activity levels are usually high. Auction bidders now must bid year-round offers requiring creative solutions in packaging varying types of DR to cover the entire year.

In addition to lower capacity prices, activity levels of some of the more prominent curtailment providers continue to demonstrate market uncertainty:

  •  EnerNOC has seen its energy efficiency management software strategy stumble. This has led to some company retrenchment and a recent agreement for EnerNOC to be acquired by the international power company Enel.
  • Comverge was recently sold (again), this time to Itron, which further contributes to an uncertain landscape. It appears that lower capacity prices make it more challenging for companies to make money on a predictable basis.

Where are we today?

A few signs of change in the DR market include:

  • The notable forward capacity markets in PJM, ISO-NE, and NYISO continue to deliver greater levels of respective grid capacity, even to the point of oversupply (above its required reserve margin). Greater availability of capacity results in a general trend of lower prices available to DR providers.
  • The Midcontinent ISO (MISO) auction results cleared at the incredibly low value of one dollar and fifty cents ($1.50). This is a stark reduction from the regional prices that rose as high as $150 MW-day in some MISO regions the prior year.
  • The NYISO also saw auction capacity prices reduced through most of its grid with the exception of the New York City and Hudson Valley zones.

Despite these challenges, DR is not going away. There remain areas in the country where capacity is constrained or limited and DR remains a viable solution. There also are utilities and curtailment providers offering larger “packaged” benefits to their customers beyond just offering and bidding DR.

Opportunities also exist for targeting DR to offset transmission and distribution assets (rather than generation). The Bonneville Power Administration in the Pacific Northwest recently announced it will not construct a proposed 80-mile, 500-kV transmission line but will instead turn to non-wire alternatives including DR. The New York State utilities are advancing numerous non-wire projects as part of REV demonstration efforts, and Consumers Energy in Michigan is carefully examining distribution assets facing constraints and considering targeted DR solutions.

As with any market solution, the viability of DR will vary in accordance with location, regulation, prices, and customer needs. While today the activity levels may seem to be slowing in some places, it is not unrealistic to envision a future in which DR offers increasing reach and wider participation.



Jeff St. John. EnerNOC Seeks Alternatives Amid Software Slump. Greentech Media. March 14, 2017.

Robert Walton. What’s The Future for Demand Response Under PJM’s New Capacity and Aggregation Rules? Utility Dive. May 31, 2017.

Amanda Cook. All Zones at $1.50/MW-day in 5th MISO Capacity Auction. Rtoinsider. April 2017.

Personal communications. P. Langbein. PJM. June 2017.

PJM. 2020/2021 RPM Basic Residual Auction Results. May 23, 2017.

Northwest Power and Conservation Council. 7th Northwest Power Plan. February 2016.

David Steves. BPA Cancels Controversial Line in Southwest Washington. Oregon Public Broadcasting. May 18, 2017.

Julien Dumoulin-Smith. PJM Take 3. Teasing Out the Key Learnings for the Future. UBS Global Research. May 31, 2017.

Robbie Orvis. The State of U.S. Wholesale Power Markets: Is Reliability at Risk from Low Prices? Energy Innovation. May 22, 2017.

EnerNOC Press Release: EnerNOC Enters Into an Agreement to be Acquired by the Enel Group for over $300M. June 22, 2017.

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Is Solar Plus Batteries Cheaper than Natural Gas Generation?

by Bob Shively, Enerdynamics President and Lead Facilitator

Tucson Electric Power (TEP) recently announced a Power Purchase Agreement (PPA) solar panels on green grassfrom NextEra Energy Resources for a 100 MW solar project combined with a 30 MW/120 MWh battery storage system. The all-in price is reportedly less than $45/MWh. Why is this news? Because TEP can purchase solar power, store it, and shift it to the system peak at significantly less than the cost of running a gas peaker. This begs the question: Are solar/battery combinations poised to displace gas peakers as a resource for meeting system peak demands? Below are some key discussion points that may help answer this question.

  1. Solar PV prices have fallen dramatically
    Recent price reductions on PV solar power have been nothing short of phenomenal and are expected to continue. Costs for utility-scale solar PV have dropped by 85% since 2009 according to the widely used Lazard Levelized Cost of Energy studies. And according to Bloomberg New Energy Finance New Energy Outlook 2017, costs are set to drop another 66% by 2040.

    Mean Levelized Cost of Utility Scale PV

    Source: Levelized Cost of Energy Analysis 10.0,

  2. Solar costs are now competitive with traditional generation sources

    What was recently considered an expensive fringe technology is now among the cheapest sources of new power supply:

    Levelized Cost of Power Generation

    Source: Levelized Cost of Energy Analysis 10.0,

  3. Solar is cheap, but what about serving peak loads?

    The main issue with solar power is that it reaches its maximum in the middle of the day, which does not correspond to the system peak:

    Net Load and Flexible Capacity Needs.png

    source: California ISO presentations

    Currently system operators tend to compensate by using gas combined-cycle or gas peaking generation to ramp quickly and pick up the system load in the late afternoon and evening.

    Now that solar power is economic, the possibility that net load curve shapes (net load curves are the remaining amount of demand served by traditional generation sources after renewable power has been taken into account) will change quickly and dramatically may result in a generation system that is not suited to grid requirements. The State of Arizona has even considered creating a Clean Peak Power portfolio requirement to ensure that growing solar power must address the peak issue, although the proceeding is currently suspended. This concept would result in different levels of renewable energy, with renewable energy that could be delivered on-peak being more valuable than traditional renewable energy.

  4. Can storage step in to fix the problem?

    Until recently, electric storage has been considered too expensive to help much with solar power’s timing issues. But battery costs, especially for lithium-ion batteries, have dropped at a rate similar to that of recent PV costs. With TEP’s announcement of a PPA for $45/MWh that includes battery storage, it appears that at least in the ideal conditions of Arizona and with current tax credits, batteries can become a mainstream technology solution[1].  If more projects can be built at costs similar to TEP’s deal we may soon be discussing not only the demise of coal but a coming demise in gas generation as well.




[1] For an explanation of how it may be possible for the low PPA price to work, and also for what the price might be without subsidies, see Utility Dive, How Can Tucson Electric Get Storage + Solar for 45¢/kWh?





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eLearning Portal, a New Enerdynamics Product, to Debut This Fall

by John Ferrare, Enerdynamics CEO

Enerdynamics’ newest business acumen training product is set for release in early Fall 2017. It combines our various learning options into one full-service source of energy business training. The eLearning Portal can be licensed for periods of one year or more and will contain all of the following:

Learning In Depth
Learners have access to up to 30 (or more) of our online training courses. Actual content can be customized to your business or industry segment. Courses can be combined into learning paths, which present comprehensive studies of various aspects of the energy industry.

Learning In a Nutshell
Learners have access to 10-minute condensed versions of available courses. These are designed for those wanting a quick overview of a topic as well as for those who have already taken a full course but just want a refresher on what they’ve learned.

Resources will include a glossary, acronyms, infographics, and our Energy KnowledgeBase encyclopedia of energy terms and concepts. Additional resources (e.g. content from our industry books) will be available to some learners depending on industry segment or customization chosen.

Current Events
Learners can access relevant and current blog posts, newsletter articles, and other content based on industry segment and customization chosen.

Enerdynamics eLearningPortal.png

Enerdynamics’ eLearning Portal provides one-stop access to important information about the energy industry. It is perfect for new hires, employees moving to management positions, or just about anyone who wants a better understanding of how the energy business actually works. And all learning is available on multiple devices including mobile, tablets, and desktops.

For more information on this exciting new product, contact us at or 866-765-5432 ext. 700.

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Basics of Natural Gas Market Participants

by Bob Shively, Enerdynamics President and Lead Instructor

From time to time in our blog posts, we like to go ‘back to basics’ for those readers new to the industry or those who have spent time in one sector and need a bigger picture of the industry. In this post we discuss the key participants in the gas industry and focus on two aspects: 1) the entities involved in physically producing gas and delivering it to consumers; 2) the participants involved in ownership of the supply since in our current unbundled world these entities are often different companies than those that physically move the gas.

Gas Delivery System Market Structure


Natural gas delivery market structure



Natural gas producers, also known as E&P (exploration and production) firms, explore for economic gas resources, drill wells, and produce gas. Because natural gas and oil are often found together, some of the largest natural gas producers are also major oil producers. But there are also numerous significant gas E&P firms independent from the large integrated energy companies.


Gathering pipelines

Connecting the lease facility with the transmission system is an important function provided by the gathering pipelines. While the producers themselves may handle this function, it is often a third party that owns and operates these small, extended pipeline systems. The third parties commonly include transmission pipeline companies and integrated midstream companies that also own processing facilities.



Processors operate the processing facility necessary to remove impurities from the gas stream and to strip valuable natural gas liquids. Like gathering pipelines, processing facilities are commonly owned by transmission pipeline companies or integrated midstream companies that also own gathering systems and other pipelines.


Transmission pipelines

Pipelines transport gas from producing regions (or supply basins) to market regions where they interconnect with the LDC system. In some cases transmission pipelines also connect directly to large consumers such as power plants or industrial facilities. There are hundreds of transmission pipelines in the U.S., but many are owned by a few large pipeline holding companies.


Local distribution companies (LDCs)

LDCs transport and distribute gas from the interstate pipeline to end users. Some LDCs are stand-alone investor-owned utilities while others are owned by larger holding companies that may also own pipelines and other energy assets.  In a few cases, LDCs are municipally owned.  The transport and distribution function is handled by the LDC regardless of whether gas supply is provided by the LDC or by a marketer.


Storage providers

Storage providers operate storage fields and offer storage services to a variety of market participants. Pipelines, LDCs, and hub operators also provide short-term storage known as balancing and/or parking. Ownership of storage facilities is largely in the hands of pipeline companies and/or independent operators. In some cases storage also is owned by LDCs.


Natural Gas Supply Market Structure


Natural gas supply market structure



Producers must find buyers for their gas production. Larger producers may market their gas directly to LDCs and, in some cases, even directly to large end users. But often, producers rely on marketers to buy their gas.


Marketers generally purchase gas supplies from producers and then resell the gas to LDCs, end users, or other marketers. Successful marketers add value by saving producers and end users the trouble of finding each other, arranging transportation and storage, and sometimes even arranging financing or assuming price risk.

LDC procurement

Except in states where regulators have completely deregulated the supply function, LDCs take responsibility for procuring gas supply for resale to certain classes of end-use customers. In most cases, smaller customers such as residential and small commercial establishments receive their gas supply from LDCs, while the larger customers (including large commercial, industrial, and power plants) purchase their supply from marketers.  In some states, smaller customers have the choice of buying from the LDC or from marketers.


Where to learn more…

If you’d like to learn more about the natural gas industry, we suggest Enerdynamics’ learning products including the book Understanding Today’s Natural Gas Business; our online courses including Gas Industry Overview and Gas Market Dynamics; or our classroom seminars including Gas Industry Basics, Gas System Fundamentals, and North American Gas Markets.

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Will States, Cities, and Corporations Negate Trump’s Decision to Quit Paris Agreement?

by Bob Shively, Enerdynamics President and Lead Facilitator

President Trump’s June 1 announcement that the U.S. will pull out of the Paris Climate change and American flag in two directions on road sign. Withdrawal of climatic agreement.Agreement on climate change action[1] was greeted by predictable comments from the agreement’s supporters and opponents. But more meaningful was the reaction of various entities who will have much to say about what happens with America’s actual future emissions. Within days, states, cities, counties, universities, non-governmental organizations, and businesses stepped forward to pledge to work together to see the U.S. meet its goals with or without support from Washington.

Under the terms of the agreement, the U.S.’ exit would not be effective until November 2020, although the government could in the meantime simply not participate in any efforts to achieve its commitments.

What is the Paris Agreement?

It is an agreement negotiated under the United Nations Framework Convention on Climate Change (UNFCC), signed by 195 countries. (Of the countries who are part of the UNFCC only Nicaragua and Syria failed to sign.) The aim is to: a) hold down the increase in global average temperature to well below 2°C and to pursue efforts to limit it to less than 1.5°C above pre-industrial levels; b) increase the world’s ability to adapt to climate changes; and c) enable finance flows to facilitate a pathway toward low greenhouse gas emissions and climate-resilient development.
Under the accord, each country sets out voluntary goals for reductions in greenhouse gas emissions (called the Nationally Determined Contribution or NDC) and, in some cases, for financial aid to help poorer countries cope with climate change. The U.S. under President Obama pledged to cut U.S. greenhouse gas emissions 26-28% below 2005 levels by 2025 as well as provide $3 billion in aid.
The agreement included no enforcement mechanism, meaning it is up to each signatory to voluntarily meet its pledges.

As of June 19, nine states, 194 cities and counties, 306 universities, and more than 1,000 businesses had signed “We are Still In,” a statement confirming their commitment to support action to meet the U.S.’ contribution. Included in the statement:

In the absence of leadership from Washington, states, cities, colleges and universities, businesses and investors, representing a sizeable percentage of the U.S. economy will pursue ambitious climate goals, working together to take forceful action and to ensure that the U.S. remains a global leader in reducing emissions.

It is imperative that the world know that in the U.S., the actors that will provide the leadership necessary to meet our Paris commitment are found in city halls, state capitals, colleges and universities, investors and businesses. Together, we will remain actively engaged with the international community as part of the global effort to hold warming to well below 2℃ and to accelerate the transition to a clean energy economy that will benefit our security, prosperity, and health.”

Significant actions have already begun. The states have come together in the U.S. Climate Alliance. Cities formed the Mayors National Climate Action Agenda. And corporations have already become the largest buyers of renewable  power in the U.S. Earlier this month, California Governor Jerry Brown recently met with Chinese President Xi Jingping to discuss direct cooperation between China and California on climate change initiatives.

Paris Agreement map.png

Source: National Geographic, compiled by Riley D. Champine


The entities signing “We Are Still In” are not small players – they make up key energy users including states such as California and New York; cities such as Baltimore, Boston, Houston, Los Angeles, New York, Phoenix, and San Francisco; and corporations such as Adidas, Amazon, Apple, Facebook, Google, Microsoft, Nike, Target, and Walmart. According to the Rocky Mountain Institute, the cities and states who signed as of June 5 had a combined Gross Domestic Product (GDP) of $6.2 trillion and a population of 120 million, while the companies had a combined revenue of $1.4 trillion. This suggests that these entities make up about 10% of the world’s economy.

As of the last year that data is available (2015) the EPA states that the U.S. has reduced greenhouse gas emissions 11.5% below 2005 levels driven largely by energy efficiency and the shift from coal-fired electric generation to natural gas and renewable electricity. This has occurred without mandates at the federal level. So can state and local governments combined with the actions of market-based corporations continue the downward trend?

Amy Meyers Jaffe, executive director for energy and sustainability at the University of California, Davis thinks so. States Meyers Jaffe: “I personally think the market itself will deliver what we committed to without much intervention. There are very few states that aren’t going in the direction of energy efficiency and renewables.”[2]

I am inclined to concur. With renewable power now the cheapest electric source available in much of the U.S. (with natural gas being cheapest in most of the areas where renewables don’t rule) state utility commissions will likely drive utilities toward these sources in regulated states, and power markets will drive the shift in competitive states. The last key factor will be emissions in the transportation sector. If current efforts to develop competitive electric vehicles are successful, it seems likely that even without support from Washington the U.S. will meet its Paris Agreement goals.


[1] Under the terms of the agreement, the U.S.’ exit would not be effective until November 2020, although the government could in the meantime simply not participate in any efforts to achieve its commitments.



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What Do Growing LNG Exports Mean for the U.S.?

by Bob Shively, Enerdynamics President and Lead Facilitator

In our latest blog post on LNG we explained what LNG is and how it is produced.  We then noted that LNG exports by the U.S. have grown substantially in the last year:

LNG exports


Now let’s explore what growing LNG exports may mean for U.S. and global natural gas markets.

U.S. LNG Export Capacity Will Increase Almost Seven-fold by 2020

The growth of exports in 2016 and early 2017 are just the start. With construction of additional export capacity ongoing at six different facilities, the U.S. is poised to have the world’s third largest LNG export capacity by 2020 (following Qatar and Australia). By the end of 2019, the U.S. is expected to have capacity of 68 million tons per annum (MTPA), which is equivalent to 3.1 trillion cubic feet (Tcf) of gas. By way of comparison, the U.S. consumed about 27.5 Tcf in 2016, meaning that if the export capacity were fully used (it won’t be) demand for gas would increase by more than 10%. And a second wave of export capacity projects is expected later, perhaps after 2025.

U.S. LNG Export Capacity
Source: EIA


U.S. LNG Exports Are Expected to Equal 11% of U.S. Production by 2025

According to EIA estimates, the U.S. will become a net exporter of natural gas next year.  Growth in LNG exports, coupled with growing pipeline exports, will flip the U.S. from its traditional role as a net importer to being a net gas exporter.

U.S. LNG is Shaking Up World Natural Gas Markets

Historically, most LNG has been traded under long-term contracts tying a specific liquefaction source to a specific destination with no flexibility to redirect supplies to markets offering a better return. In the last 10 years, the percent of LNG traded in shorter-term contracts (less than 2 years in duration) has increased from about 10% to close to 30% with more contracts allowing destination flexibility.

Pricing historically has been indexed to oil prices, but in recent years there has been some movement to instead price LNG relative to gas market hub prices in the destination marketplace. Also in this time, numerous countries have added the capability to receive LNG – the number of LNG-consuming countries has grown from 17 a decade ago to 39.  The development of off-shore floating storage and regasification units (FSRU) has allowed smaller markets to join the LNG marketplace, and the number of participating countries is expected to grow.

In the next few years, large volumes of U.S. LNG will enter the market with no destination limitations and with price indexed to Henry Hub, not oil.  This likely will have significant impacts as more and more LNG is traded in spot markets with the capability to chase the highest return and potentially land at a price significantly lower than supplies indexed to oil. Two potential impacts are prices around the world converging (which we are already seeing), and the potential for natural gas to price other fuels such as coal and oil out of the market, as we have already seen in the U.S.  A secondary benefit will be cleaner energy production as natural gas displaces more polluting fuels.

monthly average regional gas prices.png

Source:  International Gas Union (IGU) 2017 World LNG Report


The Impact of LNG Exports on U.S. Gas Markets Appears Small

U.S. producers expect to benefit from LNG growth. New markets are now available for their supplies, and there is the possibility that export profits could be higher than sales of gas at home. Meanwhile, consumers in the U.S. may be wondering what is in it for them.  While LNG exports certainly don’t help U.S. consumers, most analysts seem to agree that they won’t hurt customers all that much either. Clearly an increase in export demand has the potential to cause prices to rise. But most observers believe that the U.S. has ample supply to cover both consumer demand and exports while keeping prices at moderate levels.

A 2015 study performed for the U.S. Department of Energy concluded that “most of any U.S. LNG exports would be made possible by increased extraction rather than the diversion of natural gas supplies.” The key is for production to continue to increase. If producers find it difficult to produce low-cost shale gas supplies due to technical, political, or environmental reasons, then our conclusions could change quickly. So as with most things associated with natural gas, it will be important to keep a watchful eye on the market fundamentals.

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How the LNG Delivery System Works and What LNG Means for the U.S.

by Bob Shively, Enerdynamics President and Lead Facilitator

The winter of 2016/2017 was the first winter season with liquefied natural gas (LNG) exports from the continental U.S. Historically the U.S. exported small amounts of LNG from a facility in Alaska, but the first LNG exports from the Lower 48 began in February 2016 with a shipment from Louisiana’s Sabine Pass facility. Exports continued through the year and dramatically increased beginning in November. Countries receiving U.S. LNG supplies in the first year included China, India, Japan, Jordan, Kuwait, Mexico, Portugal, Spain, and Turkey.

LNG exports

Going forward through the remainder of the decade, export capacity is expected to continually increase with the completion of multiple projects. By 2020 export capacity will reach 8.6 Bcf/d, which if fully utilized would roughly be equivalent to 12% of the average annual demand of U.S. gas consumers.

In the Part Two of this two-part article, we will explore how LNG demand is expected to grow and how it may impact gas markets. But first, we will go back to the basics and review what LNG is and how it is produced.

What LNG is

In its natural state at atmospheric pressure and normal temperatures, natural gas is in gaseous form. It is most commonly transported via pipeline as it is too voluminous to be transported by truck or ship in quantities that are meaningful for most consumption.  But when natural gas is cooled below approximately -260 degrees Fahrenheit (-162 degrees Celsius) it becomes liquid and its volume is reduced by a factor of about 610.  The resulting liquid is called liquefied natural gas or LNG. Because its volume has been reduced dramatically, LNG can often be economically transported via ship or truck, and it can also be stored in above-ground tanks for use as gas distribution peaking supplies.


How LNG is Produced and Delivered

LNG Delivery System by Enerdynamics

(For a downloadable version of the above graphic, visit Enerdynamics’ website.)

Natural gas is produced from underground reservoirs, brought to the surface, and processed to remove impurities and valuable natural gas liquids (NGLs). To make LNG, natural gas from the production field is first processed and then cooled in a liquefaction plant. The LNG is stored at atmospheric pressure in double-walled cryogenic tanks that keep the gas cooled in a liquid state until a tanker is available.



LNG is then shipped in an LNG tanker, which is a double-hulled ship specially designed to keep the natural gas cool. Tankers move the LNG from the production area to a regasification terminal near the point of consumption. In most cases, regasification takes place at a terminal although in some cases this process occurs aboard the tanker (if the tanker is a regasification vessel).

If regasified on board the vessel, the gas is then put directly into an undersea pipeline that connects to the onshore pipeline grid. When not regasified on board, the LNG is off-loaded from the tanker into a storage tank similar to those used at the liquefaction plant.  When the gas is needed, it is taken from storage and sent through a regasification plant where it is warmed in a carefully controlled environment so that the LNG reverts to a gaseous state, and the pressure is increased to match the pressure of the pipeline it is entering. Finally, the gas is put into the pipeline where it is commingled with other gas supplies and delivered to consumers.

Why does LNG matter?

With the development of new LNG export facilities, there is the potential the U.S. could become the world’s largest exporter of natural gas by 2030. This could prove to be an economic boom to U.S. gas producers, but it also may put pressure on the environment and the price paid by U.S. gas consumers. Now that you understand how LNG is produced and delivered, our next blog post will more thoroughly explore the future of U.S. LNG exports.

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Energy Books to Read This Summer

by Bob Shively, Enerdynamics President and Lead Facilitator

Books to read concept on blackboard with empty paper sheet

Ready for summer and want to catch up on your energy reading?  Want some good books to give you an in-depth view of the current energy industry and how rapidly it is changing? Here, in no particular order, are current books we recommend:

  1. The Quest: Energy, Security, and the Remaking of the Modern World, by Daniel Yergin

    Yergin originally came to fame with his Pulitzer Prize winning book The Prize, which chronicled the history of the oil industry through the 1991 Gulf War. His follow-up book expands to consider the whole energy industry with coverage of oil and gas since 1991 plus electricity, climate, renewables, and the road to the future.  If you want to get a big-picture history of the energy industry in 717 pages, there is no better source than The Quest.

  2. America’s Utilities, Past Present and Future, by Leonard S., Andrew S. and Robert C. Hyman

    If you want a better understanding of electric utilities, then turn to the latest edition of America’s Utilities. Originally written by long-term utility industry expert Leonard Hyman, the latest edition has been updated to include the recent evolution of the electric industry. Here you can learn the principles behind how utilities run their business, the history of utilities, how they are regulated, and what the future may hold.

  3. The Grid: The Fraying Wires Between Americans and Our Energy Future, by Gretchen Bakke

    This is one we haven’t read yet, but we have heard Bakke interviewed and as a cultural anthropologist she carries an interesting perspective on our grid. Not sure I’d agree with the “Fraying Wires” subtitle, but from what readers have told me, the book does a good job of discussing our electric grid from a holistic viewpoint including technology, legal, regulatory, and environmental perspectives in a language anyone can understand.

  4. Reinventing Fire: Bold Business Solutions for the New Energy Era, by Amory B. Lovins and Rocky Mountain Institute

    Way back when I was a young engineer at Pacific Gas and Electric, the story went that company executives would hide in their offices when Amory Lovins was known to be the in the building. Why? He was a vociferous advocate for what then was considered a radical concept — demand side management. Now demand side management has become mainstream, but Lovins is still pushing corporations and governments around the world to continue an energy transformation from fossil fuels to clean energy. Reinventing Fire lays out a clear and compelling roadmap for how the transition can be effectively implemented. There is perhaps no better view of the future of the energy industry.

  5. Powering Forward: What Everyone Should Know About America’s Energy Revolution, by Bill Ritter

    The former governor of Colorado and current director of the Center for New Energy Economy at Colorado State University lays out his vision for our energy transition from a policy viewpoint. Perhaps most compelling is Ritters’ vision that the transformation will occur at the state and local levels regardless of what is occurring in Washington.

  6. Understanding Today’s Natural Gas Business and Understanding Today’s Electricity Business, by Bob Shively and John Ferrare

    We can’t let a list of good energy books go out without including our companion industry primers! These books are written in straightforward, easy-to-understand language and are loaded with interesting charts and illustrations to help readers digest energy industry concepts and terms quickly and easily.

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