While high demand spurs U.S. gas production, low-carbon and green shift set to curb emissions

The global energy crisis has put the security of supply at the top of the countries’ agenda worldwide, leading to elevated prices, tight supply and high energy demand. As a result, the U.S. Energy Information Administration (EIA) believes that the increased demand will bolster American natural gas production while accelerated electrification and more zero-carbon power sources are projected to reduce U.S. energy-related CO₂ emissions.

According to projections from EIA’s Annual Energy Outlook 2023 (AEO2023), the U.S. energy-related CO₂ emissions will drop 25 per cent to 38 per cent below what they were in 2005 by 2030. By the end of 2050, these emissions are expected to be 17 per cent lower in this year’s reference case compared with last year, after EIA accounted for the effects of the Inflation Reduction Act (IRA), energy technology costs and performance updates, a changed macroeconomic outlook, and other factors.

The Annual Energy Outlook 2023 explores long-term energy trends in the United States, showing that energy-related CO₂ emissions are expected to fall across all AEO2023 cases. EIA’s projected reductions in U.S. energy-related CO₂ emissions are driven by increased electrification, higher equipment efficiency, and the deployment of renewables in the electric sector.

As a reminder, the United States’ nationally determined contribution (NDC), submitted as part of the Paris Agreement, calls for a target of 50 per cent to 52 per cent of net greenhouse gas emissions below the 2005 level by 2030.

Moreover, all AEO2023 cases, which only consider energy-related CO₂ emissions and do not cover the full NDC scope, show a significant shift toward lower future emissions. However, emissions reductions are limited by longer-term growth in U.S. transportation and industrial activity.

As a result, these projected emissions reductions are most sensitive to EIA’s assumptions regarding economic growth and the cost of zero-carbon generation technology. In addition, renewable generating capacity is anticipated to grow in all regions of the United States in all AEO2023 cases, supported by growth in installed battery capacity.

IEA further sees stable growth in U.S. electric power demand through 2050 in all cases due to increasing electrification and ongoing economic growth while the combination of declining capital costs and government subsidies, including IRA initiatives, drive rising renewable technologies for electricity generation, such as solar and wind.

Bearing this in mind, IEA forecasts renewable generating capacity growing in all regions of the United States in all cases while the investment in renewable sources and the operating cost advantage of those sources increases the share of zero-carbon electricity generation in EIA’s projections.

In line with this, solar generating capacity is expected to grow by about 325 per cent to 1,019 per cent by 2050 across all cases, compared with 2022, while wind generating capacity is anticipated to grow by about 138 per cent to 235 per cent. The growth in installed battery capacity in all cases will support this growth in renewables. Across the span of AEO cases, relative to 2022, natural gas generating capacity ranges from an increase of between 20 per cent to 87 per cent through 2050.

Based on IEA’s outlook, the U.S. electric power sector’s composition is changing along with increased electrification in the end-use sectors with more heat pumps and electric vehicles, as well as electric arc furnaces increasingly deployed in the iron and steel industry. In the residential and commercial sectors, higher equipment efficiencies and stricter building codes are expected to extend ongoing declines in energy intensity.

Despite the growth in adopting heat pumps, IEA claims that natural gas-fired heating equipment, including furnaces and boilers, will continue to account for the largest share of energy consumption for space heating in U.S. residential and commercial buildings across all cases through 2050.

On the other hand, high international demand is anticipated to lead to continued growth in U.S. production and combined with relatively little growth in domestic consumption, EIA underlines it would allow the United States to remain a net exporter of petroleum products and natural gas through 2050 in all AEO2023 cases.

Despite no significant change in domestic petroleum and other liquids consumption through 2040 across most AEO2023 cases, EIA expects U.S. production to remain historically high as exports of finished products grow in response to growing international demand.

The Energy Information Administration underscores that domestic natural gas consumption will remain relatively stable—ending recent growth in most cases – despite the shift toward renewable sources and batteries in electricity generation. In some cases, natural gas consumption is expected to continue to grow in response to international demand for liquefied natural gas (LNG), supported by associated natural gas produced along with crude oil.

Joe DeCarolis, EIA Administrator, remarked: “With policy changes over the last year and continued technology innovation, we expect to see significant shifts in energy production and use over the next 30 years. The resulting projections for energy-related CO₂ emissions are most sensitive to our assumptions regarding economic growth and the cost of zero-carbon generation technology.”

Under the IRA, clean energy projects can receive additional credits on top of a base credit value if they satisfy certain requirements. For instance, clean energy technologies that meet minimal eligibility requirements receive a base-level production tax credit (PTC) while projects meeting labour requirements receive a tax credit five times higher than the base amount.

Additional increases to the base tax credit are available for projects that meet domestic content requirements or are located in energy communities, which are defined as former brownfield sites, areas with above-average unemployment rates, or areas that rely on fossil fuel industries for employment or tax revenue.

EIA’s report assesses changes to the energy system and U.S. energy-related carbon dioxide (CO₂) emissions due to IRA implementation, holding other assumptions constant. To meet this objective, EIA assesses the effects of the IRA by comparing the Reference case, which includes IRA provisions, against a case that excludes all IRA provisions.

The Reference case reflects the most likely tax credit uptake and assumes qualified technologies receive the base tax credit and some bonus credits. In the Reference case, EIA assumes all eligible technologies in the electric power sector fulfil the labour requirements while certain grid-scale technologies, such as new wind projects, fulfil the labour and the domestic content requirements.

In contrast, the No IRA case is a comparison against the Reference case and assumes the same economic, technology characteristics, and market outlooks. To address some of the uncertainty around IRA provisions, EIA presents two additional cases with variations of certain tax credits and incentives applied to eligible technologies that explore the IRA’s range of impacts.

In lieu of this, EIA assumes most qualified technologies in the Low Uptake case receive the same or fewer credits than in the Reference case, and, in the High Uptake case, they receive the same or more credits. The Low Uptake and High Uptake cases form the lower and upper bounds of the IRA provisions’ impact. In this analysis, EIA found that assumptions around the bonus credits have a substantial impact on the results.

In the No IRA and Low Uptake cases, implementation of the IRA is expected to result in a reduction in U.S. CO₂ emissions of 26 per cent and 27 per cent, respectively, by 2030 from 2005 while the Reference and High Uptake cases go further and reach reductions of about 33 per cent and 34 per cent, respectively. By 2050, the No IRA and Low Uptake cases reach a 28 per cent reduction below 2005 levels compared with 34 per cent in the Reference case and about 35 per cent in the High Uptake case.

Furthermore, the emissions decline comes due to carbon-free resources providing more electricity by 2050 than coal and natural gas. EIA highlights that the IRA provisions in the Reference case push wind and solar to 56 per cent of electricity generation by 2050, and, in the Low and High Uptake cases, the range is 41 per cent to 59 per cent when varying the bonus provisions.

As more renewables are deployed, electricity generation from coal declines, which, in turn, lowers coal production in 2050 to 269 million short tons (MMst) in the Reference case and to 249 MMst in the High Uptake case. These 2050 levels are 25 per cent to 31 per cent lower compared with the No IRA and Low Uptake cases.

Even though natural gas production is set to grow through 2050 in all cases, primarily to meet global demand, across the three IRA cases – High Uptake, Low Uptake, and No IRA – natural gas production ranges from about 1 per cent to 5 per cent lower in the Low and High Uptake cases compared with the No IRA case.

In line with this, LNG exports are anticipated to grow in all cases, particularly in the Reference and High Uptake cases, due to reduced natural gas demand for power generation and relatively low domestic natural gas prices, which support wider spreads between domestic and international LNG prices.

Within its Annual Energy Outlook 2023, EIA omitted certain IRA provisions and programmes, such as the Advanced Industrial Facilities Deployment Programme and the tax credit to encourage the domestic production of hydrogen.