Natural Gas Demand Response – Not Just for Electricity Any More: Part 2

Coauthored by Brett Feldman

What Is Holding Back Natural Gas Demand Response?

As we discussed in our earlier blog, demand response (DR) in the electricity sector has been a common practice for decades for utilities and grid operators. Historically, DR has been less prevalent in the natural gas industry, but changing market factors have increased interest in the practice.

In this blog, we discuss the opportunities for DR in the natural gas sector and describe some of the major challenges. A key area of opportunity for natural gas DR lies in alleviating pipeline capacity constraints during periods of peak usage, which are typical spikes in demand driven by extreme weather or logistical issues.

Natural gas DR is alluring because it is theoretically less expensive than expanding existing infrastructure or constructing new pipeline and it incentivizes consumers of natural gas to defer or forego demand during periods of peak usage in exchange for compensation. Before we can determine the price of deferred natural gas consumption, however, we must establish its value.

What Is the Value of Natural Gas DR?

One of the reasons electric DR has been successful is that it reduces electric demand. Perhaps most importantly, it also has a clear, established value: the wholesale, retail capacity, and energy price that an electric DR provider typically receives for each negawatt of reduced demand that other market participants—like generators—are paid for each megawatt of delivered power.

There is no equivalent price for a nega-molecule of methane in natural gas markets. The price value of gas DR would have to be a negotiation due to an absent market structure. To provide an incentive for natural gas DR, the price would need to be equal to or less than the price paid for consuming the gas. A key challenge to determining the value of DR is that although natural gas prices can demonstrate significant volatility during periods of increased demand, many consumers of natural gas do not pay these high prices—at least not directly.

How Do We Develop a Price Signal?

Residential consumers, for example, purchase their natural gas supply and transportation through their local distribution company (LDC). The LDCs, in turn, typically rely on a variety of gas transportation and commodity supply plans with varying terms and prices. As part of their obligation to serve, the LDCs are required to build gas supply plans that mitigate the exposure of customers to volatility in prices. During a period of extreme increases in demand, the LDC may need to procure additional supply during certain days throughout the year, but these purchases are typically a small fraction of the overall daily demand. Most LDCs charge customers monthly, which causes the extreme price increases to become a small component of the overall bill.

Many commercial and industrial (C&I) customers, including power generators, purchase natural gas supply from a LDC. Larger C&I customers arrange transportation through an interstate or intrastate pipeline company to obtain their commodity via a marketer. Although the physical delivery arrangements are different compared to the residential sector, the economics are similar and the barriers to the development of a price signal for deferred consumption remain the same.

The absence of a clear price signal is a significant impediment to the adoption of natural gas DR despite the promise of providing a potentially less expensive means of alleviating pipeline constraints. Regardless of these challenges, natural gas DR offers a viable method to shift gas consumption during periods of peak demand.

Part 3 of our blog series will explore what utilities have tried for natural gas DR in the past and what new concepts could develop in the future.