Strategic implications of the age of integrated power and gas

The transition from coal or oil to gas has become a pivotal strategy for reducing greenhouse gas emissions in the power sector across various regions. Simultaneously, the rise of LNG is creating a global gas market that connects regional markets. The interplay of these trends will lead to the age of integrated power and gas, and carries profound implications for both the gas and power sectors.

Transitioning from coal to natural gas across many global markets is driven by the need to meet rising demand, reduce carbon emissions and maintain adequate dispatchable capacity. As long as medium- to long-duration storage solutions remain underdeveloped, the contribution of weather-dependent renewable technologies will remain limited, making gas capacity essential for ensuring power supply security.

This growing reliance on gas for dispatchable capacity means that power markets are increasingly vulnerable to fluctuations in gas supply and prices. Additionally, this reliance significantly alters gas market dynamics, as the power sector's role in balancing the gas market diminishes. The reduction in non-gas dispatchable capacity removes a vital source of demand-side flexibility from the gas market, which will increasingly be called upon to meet power flexibility requirements.

The rise of LNG: Catalyzing global integration of gas markets

The acceleration of the expansion of LNG is forging connections between regional gas markets. This growth is driven by rising energy demand, lower emissions compared to other fossil fuels, technological advancements that unlock new resources and reduce costs and increased supply diversity as new market entrants emerge.

Both importing and exporting countries are impacted by the globalization of gas markets. For instance, LNG-exporting nations like the US may face rising domestic hub market prices due to heightened export demand. Furthermore, pipeline flows can be indirectly influenced by LNG, as market players engage in arbitrage across different gas transport routes.

Consequences

The simultaneous growth of the LNG market and the increasing reliance of power generation on gas are driving the emergence of globally interconnected gas and power markets, resulting in significant shifts in market dynamics.

Gas prices will have a more pronounced effect on power prices, particularly in liberalized markets where gas-fired power plants often determine the market-clearing price. And the dynamics of power and gas markets will become more globally interconnected, with gas prices serving as a key transmission mechanism.

This global interconnectedness will allow a global balancing of weather patterns, which is crucial as energy systems transition to decarbonize using weather-dependent renewable technologies.

Concurrently, the likelihood of globally interconnected gas and power crises will however increase as local disruptions create ripple effects across all gas-consuming nations, impacting their gas and power systems.

Strategic implications

Criticality of gas assets

Gas-fired power plants and the entire gas infrastructure -- including production, storage and transportation -- are fundamental to the dynamics of gas and power markets and the security of supply. Maintaining their ability to deliver essential services, even in times of crisis, is crucial for ensuring the supply reliability of gas and power.

Simultaneously, fuels and technologies that minimize exposure to global gas and power market fluctuations while offering dispatchable power capacity are likely to increase in strategic value.

Gas and power strategy

Global cross-fuel and vertical integration present strategic avenues to capitalize on market opportunities and mitigate supply risks.

Cross-fuel integration, which includes flexible LNG, gas storage and power positions, provides benefits in managing market risks and unlocking broader market opportunities.

Additionally, vertical integration or long-term contracts with firm delivery commitments can help protect from global supply uncertainties.

Security of supply planning

The rising risk of integrated global gas and power crises underscores the necessity to integrate power and gas security assessments. Achieving this requires effective institutional arrangements and governance. However, fully integrated gas and power planning remains the exception rather than the norm.

Furthermore, most security assessments for gas and power are limited to national or regional scopes. Expanding these assessments beyond traditional geographical boundaries would significantly enhance risk analysis.

Toward global power geopolitics

Power has traditionally been viewed as a regional commodity, with international electricity flows constrained by the high costs associated with long-distance transmission. However, the LNG-enabled growing interconnectedness of power markets necessitates a shift in perspective, recognizing that power is no longer solely a local issue.

Security of supply will emerge as a third driver behind the internationalization of power politics -- alongside clean technology supply chain interdependencies and electricity pricing -- a critical factor for energy-intensive processes competing on a global scale.

Uncertain duration of the age of integrated power and gas

The prevailing consensus is that the world is moving toward an energy system that is increasingly dominated by low-carbon electricity. During this transition, the era of integrated gas and power will play a pivotal role, acting as a vital bridge to a low-carbon power system. The successes and challenges faced during this period will profoundly shape the future landscape of power systems, and the significance of this transitional phase should not be overlooked.

A critical factor will be the interplay between power supply security and weather patterns. As we shift from coal to electric renewables, the vulnerability of gas and power system adequacy to fluctuations in wind, solar and hydro output will rise -- variations that are currently mitigated by thermal generation in most power grids.

Furthermore, the integration of gas and power may become a lasting characteristic of the energy system. The combination of locally produced and globally traded electrons and gaseous molecules could remain essential for ensuring power supply security, indicating that the era of integrated gas and power might endure even longer than anticipated.

Further reading: The age of integrated power and gas