Natural Gas Finds a Friend in US Climate Policy

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The White House's renewed push on climate change may have an unintended consequence—sparking new demand for natural gas, which is fast becoming a staple in creating electric power.

Last week, President Barack Obama gave a speech that unveiled a broad array of new initiatives to reduce carbon emissions and buttress alternative energy. According to many observers, those new rules could come at a cost to coal plants—one of the culprits behind greenhouse gases, and integral to generating electricity.

Playing the Natural Gas Revolution
Playing the Natural Gas Revolution

Yet industry participants say that independent of the stricter environmental rules, utilities are already moving to modernize their fleet of coal plants.

The Edison Electric Institute (EEI), an association of U.S. shareholder-owned electric companies, says power-sector carbon dioxide emissions are now 15 percent below 2005 levels—ahead of a presidential directive that targeted 17 percent. Part of that is because of natural gas use, experts say.

"We are transitioning more coal plants to natural gas and shuttering some completely," said Quinlan Shea, EEI's vice president for environment, in an interview.

Saying the industry is "not afraid of engaging the climate policy issue," Shea said that power producers would retire about 20 percent of their existing coal plants in the next few years, replacing at least part of that with natural gas.

NatGas Gains, but Coal Still a Factor

Natural gas "clearly makes sense today based on what we perceive to be its affordability and plentiful supplies," Shea added. "Generally we're encouraged by natgas, and economics dictate that smaller, older coal plants be shuttered … and be replaced by natural gas. A lot of that is happening right now."

Despite its notorious reputation as a dirty fuel, coal is a dominant part of electricity production. According to the World Coal Association, the carbon-based fuel fires 41 percent of power plants around the world, with gas a distant second at 21 percent.

Enter natural gas, which has become more abundant amid the explosive growth of U.S. shale production. In the past few years, utilities have increasingly turned to natgas as a cheaper and cleaner way to create electricity, helping to contain consumer costs.

While most energy watchers expect the industry to remain reliant on coal in the medium term, they acknowledge stricter environmental standards—and the potentially higher costs of using coal—could provide more momentum for natgas, a trend already well established.

"There is no question that the use of natural gas for electricity generation has increased substantially over the past few years," said Michael Krancer, a lawyer who heads Blank Rome's energy practice.

"That is a main reason that United States carbon emissions reductions have been so substantial which has been noted by many different observers," Krancer said. "The trend toward using natural gas for electricity generation is continuing for a host of reasons including the low cost of natural gas as fuel."

James Hempstead, a power and utilities analyst at Moody's Investors Service, said the efficiencies and economics of natural gas have encouraged power companies to move toward the fuel source. However, that comes with some caution.

The Energy Information Administration recently pointed out that natural gas prices have rebounded sharply since plumbing record lows last year. "In response, electricity generators used 16 percent less natural gas this March compared with March 2012," the agency added.

"Natural gas prices have a tendency to be pretty volatile," Hempstead said. "If natgas prices spike up…it will have a dampening effect on consumers' ability to pay rates."

Costs to utilities, including new environmental mandates, "means that there will be additional costs and investments they need to make into their plants," he said, which could get passed along in the form of higher retail electricity prices.

—By CNBC's Javier David.