This is a strange time for natural gas.

Known for years as the “bridge fuel” that would help the United States transition from coal to a carbon-free future, this should be its moment to shine. Coal, a main competitor, is on the decline, the United States is moving to export liquefied gas, power utilities are investing directly in the resource, and the Clean Power Plan ensures the continued transition away from dirtier sources of energy.

But instead of being in demand, gas is cheap – according to the U.S. Energy Information Administration, production is growing about twice as fast as consumption. So, why are utilities investing in it?

Marketed gas production will rise from 70 Bcf/d in 2013 to almost 81 Bcf/d next year, the agency predicted in its recent Short Term Energy Outlook. But during that same time, overall consumption will go from 71.66 Bcf/d to only about 76 Bcf. In other words, we're producing more than we need.

Henry Hub gas, the liquid point often used as a benchmark, traded at $3.84 per thousand cubic feet (Mcf) in 2013. Next year, EIA predicts $3.14/Mcf.

Against this backdrop of oversupply – there is a chance U.S. storage will finish the refill season at an all-time high, above 4,000 Bcf – electric utilities have begun investing in gas reserves, pipelines, capacity and wells. While the idea is to lock in lower-priced fuel, the move puts the risk on consumers, and at a time when few predict a strong rebound in prices.

South Dakota-based Black Hills Corp. recently asked regulators in five states to allow its utility subsidiaries to make ratepayer-financed investments in natural gas resources. New Hampshire has cleared the way for utilities to purchase pipeline capacity. Southern Co. got a toehold in the market when it bought AGL Resources, a gas distributor.

Duke Energy, which owns regulated utilities operating in several states, has announced it would develop the Atlantic Coast Pipeline through its commercial pipeline business, along with Dominion. Some of Duke's regulated utilities will be customers of the pipeline.

And just this week, Duke announced that it would buy Piedmont Natural Gas, a gas distributor in the Carolinas and Tennesee and one of its partners on the pipeline, for $4.9 billion. That move goes beyond simply investing in natural gas and its transportation infrastructure for power generation purposes, placing the utility squarely in the gas distribution business. 

The jury is still out on these investments, but it is possible that Florida Power & Light is the canary in the proverbial coal mine. Last year the utility got the go-ahead — the first in the nation — from state regulators to invest in Oklahoma gas fields, but so far the returns have been far below what was promised. While FP&L is still predicting millions in long-term savings for customers, the investments have actually lost money so far and the projected benefits have been slashed by about half.

At the same time, many now question gas' status as that “bridge fuel.” Energy storage technologies are being developed that could theoretically allow utilities to eliminate the need for gas to integrate renewable resources, and the fuel has its own emissions questions as well. But at least in the short term, utilities see gas as a sure bet.

“You would be a foolish person to try and forecast long-term fuel prices,” said Phil Grigsby, vice president of Duke's commercial pipelines sector. But that said, the company remains bullish on gas and sees a continued place for it in its portfolio.

“Natural gas is going to play a very important part of the generation mix going forward,” Grigsby said. “Energy is going to become increasingly clean for us, and gas is one way we're going to do that.”

FP&L: Investments will save customers $49 million

FP&L last year got approval to invest in its Woodford shale gas reserves project, partnering with PetroQuest Energy to develop 38 production wells in the southeast portion of Oklahoma. The utility gets a portion of the gas produced, helping to offset the 2 Bcf/d it was purchasing last year. But prices have remained at historic lows, meaning customers are actually taking a loss so far.

In its original request for approval from the Public Service Commission, filed in June 2014, FP&L told regulators it had identified $107 million as the midpoint of the range of anticipated customer savings. That figure was based on a “variety of factors, including natural gas forecasts at that time,” a company spokesperson said via email. And a revised estimate of $49.2 million in cumulative savings is still within the projected range.

“Even with natural gas prices historically low, and even though we might be anticipating a loss in the first year, we are estimating nearly $50 million in savings for customers over the life of the Woodford project – savings that are above and beyond the cost of the investment,” said Sarah Gatewood, FP&L senior communications specialist. 

Gatewood said the project is performing well and the utility is already using the gas at its power plants.

“While lower natural gas prices may reduce our current projected customer savings for the Woodford project, it continues to be a great investment for customers,” she said. “We’re getting more gas at a lower cost than originally anticipated.”

Fuel charges paid by the utility's customers are near their lowest levels in a decade – in May, FP&L reduced  customers’ 2015 fuel charge by more than $200 million, or about $3 per month for the typical residential customer.

Still, tension remains between environmentalists and the state's utilities, with green groups pushing power companies to choose renewables over more gas generation and to expand access to rooftop solar.

Gas demand is flat, and challenged by alternative technologies

EIA said it expects total consumption of natural gas to remain stable next year, bumping up from 76.2 Bcf/d to 76.38 Bcf/d. The amount of natural gas burned by the power sector is actually expected to decline slightly, but with states in the very preliminary stages of developing Clean Power Plan compliance strategies it is difficult to predict just where demand will go.

A new survey out by Black & Veatch finds the gas industry remains upbeat, pointing to the greenhouse gas limits as a possible boon to gas demand. But while the findings show 75% of the gas industry sees new carbon regulations as a positive, the report was also cautious in its analysis.

"From a regulatory perspective, the final version of the U.S. Clean Power Plan fostered concern within the industry because its focus on renewable energy and limits on carbon dioxide emissions were at odds with the treatment of natural gas in the draft regulation," B&V's report said.

A variety of new technologies are now being viewed as a threat to gas demand, and the Clean Power Plan could wind up leading states away from gas. While the draft proposal was more friendly to the gas sector, the version finalized in August emphasizes a shift to renewables, putting less of a focus on gas.

Even when assessing the less-aggressive draft proposal, the EIA still predicts that utilities will need to begin to retire many gas assets near the end of the CPP compliance period in 2030. In the graph below, EIA demonstrates that gas retirements would be greatest in scenarios with high economic growth (CPPHEG) or when nuclear energy is prioritized for compliance (CPPNUC), but minimized when the nation produces more gas, keeping prices low (CPPHOGR). 

Beyond the impact of renewables, nuclear power could be a spoiler for gas in fully-regulated markets where new plants can still be built. While North Carolina is challenging the plan, officials say nuclear could be the go-to when it comes to carbon compliance, instead of more gas plants.

Department of Environmental Quality Secretary Donald van der Vaart said last month that officials are also looking at nuclear generation as a way to "leapfrog" natural gas. 

"The real discussion we need to be having in North Carolina is about nuclear power, and it is a discussion we are having," van der Vaart said at the John Locke Foundation. "[Nuclear] is really the dual plan to put in place in case we lose the litigation, because we need to leapfrog natural gas."

And with the price of energy storage declining, some see the potential to replace gas peakers with batteries. NextEra Energy CEO Jim Robo at an event last month said he expects energy storage will begin to replace gas peaking plants after 2020, and a San Diego Gas & Electric executive echoed that sentiment at an energy storage conference last month, saying he sees a coming future with "no more gas turbines."

But any shift away from gas, other attendees noted, will be gradual, and utilities will continue to use their gas assets for generation and renewables integration even as energy storage technologies proliferate. 

“[Natural gas peaker plants] are here, they’re all over our ecosystem, and they’re going to be here for a while,” said Patrima Rangarajan, storage manager at Current, GE's new billion-dollar clean energy venture. “I don’t see anyone pulling peakers out of the ground.”

Atlantic Coast Pipeline and Duke's gas outlook

Duke and Dominon, along with Piedmont Natural Gas and AGL Resources, filed plans for the Atlantic Coast Pipeline with FERC last month. The 564-mile system will have a capacity of 1.5 million dekatherms/day and cost $5.1 billion to develop.

The system will take gas from West Virginia to markets in North Carolina — a state served by only one major pipeline right now. The bulk of the pipe capacity will go towards power generation (about 80%, long-term), and major customers include Duke Energy Carolinas, Duke Energy Progress and Virginia Power Services Energy.

"Having access to multiple supply basins and suppliers is beneficial," said Duke's Grigsby, the VP of commercial pipelines. "Not having all of our resources from one particular place is better, as we've done in the past." There were years, he said, where prices rose because Duke couldn't access some Midwest supply basins.

Grigsby also said Duke is not too concerned with the possibility that other technologies could make the pipeline a bad bet — instead, ACP will be able to help integrate increasing amounts of renewable energy. 

"Certainly, there are advances going on in energy storage," he said. "But I think natural gas will play a very meaningful part going forward, not just for power generation but other uses as well. Atlantic Coast Pipeline will not suffer in the short term from any of those reasons."