IHS CERAWeek 2013 Preview: How vulnerable is power sector natural gas demand to energy efficiency policies?

Electric power generation is the single biggest driver of global gas demand growth. IHS CERA's planning case outlook points to growth of some 80 billion cubic feet (Bcf) in global gas demand in 2035 relative to 2012 levels, half of which will come from higher demand from the power sector.

Yet the future growth rate of electricity demand is not a given. New energy efficiency policies implemented recently in the European Union and more than half of US states are imposing binding energy efficiency targets on utilities, requiring them to cut their customers' electricity demand by a set percentage. Although some targets would only slow demand growth, the majority aim to flatten or reverse it.

In response to this crucial development and the significant uncertainty surrounding power demand, on Thursday, 7 March, as part of IHS CERAWeek 2013, we will hold a session on Electricity Demand and Efficiency: Filtering the Noise from the Signal. Leading experts from North America and Europe will debate the future impact of energy efficiency policies, as well as other key drivers, on electric power demand, and thus gas demand.

Our own research on the US market indicates that power demand will grow at a little under 1.5% per year this decade. However, if we were to assume that all state energy efficiency targets are fully met, it would lower our planning case outlook by about a third, to 1% over 2010-20.

Natural gas-fired power plants serve as the marginal source of generation in most US power markets. Therefore they would be the first and hardest hit by a drop in demand resulting from greater energy efficiency. If state efficiency targets are met, we estimate that 2020 natural gas demand would be 8%, or 2 Bcf per day, lower than our planning case estimate of about 27.5 Bcf per day.

Although these policies will likely have a significant impact, there is reason to believe that many of the most aggressive targets will go unmet. Targets that require utilities to procure the equivalent of 2% of sales from efficiency measures year after year have yet to be truly tested. Further, utilities have traditionally not had an incentive to invest in demand-side efficiency measures; in fact, doing so would have been contradictory to their business model. Utilities require strong financial incentives to drive them to achieve their targets. However, fewer than half of the states with efficiency targets currently have a sufficient complement of incentives and penalties in place.

Delegates of this year's conference will have the chance to explore this topic further and engage with each of our expert panelists during IHS CERAWeek 2013.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.