U.S. Power Grid Operators Forgo Gas-to-Oil Fuel Switch

This article first appeared on the BNEF mobile app and the Bloomberg Terminal.

  • Cheap crude has yet to penetrate U.S. electricity markets
  • Recent price spreads are nowhere near historical lows

U.S. power plants rarely burn oil. Coal and natural gas dominate the electric grid, with oil-fired units reserved purely for backup purposes. Until recently, conventional wisdom suggested the U.S. power sector would never consume meaningful quantities of oil. Coal and natural gas were simply cheaper.

The recent drop in crude prices raises the possibility of widespread gas-to-oil fuel switching. At least in theory, if oil prices undercut gas prices, oil plants can turn on to replace gas plants.

We have observed zero evidence of this happening. There has been no uptick in oil-fired generation, despite narrowing price spreads between fuel oil and natural gas.

Recent changes in oil-gas spreads are minuscule compared to what prompted the last big oil-burn bonanza: In January 2018, very cold weather (dubbed the ‘bomb cyclone’) created a surge in natural gas prices. Oil burn spiked. This historical event demonstrated how steeply oil-gas price spreads needed to flip, in order to trigger meaningful quantities of oil burn.

BNEF Shorts are research excerpts available only on the BNEF mobile app and the Bloomberg Terminal, highlighting key findings from our reports. If you would like to learn more about our services, please contact us.

About BloombergNEF

BloombergNEF (BNEF) is a strategic research provider covering global commodity markets and the disruptive technologies driving the transition to a low-carbon economy. Our expert coverage assesses pathways for the power, transport, industry, buildings and agriculture sectors to adapt to the energy transition. We help commodity trading, corporate strategy, finance and policy professionals navigate change and generate opportunities.
Sign up for our free monthly newsletter →

Want to learn how we help our clients put it all together? Contact us