From Business Models to Market Growth

US utilities are regulated monopolies that provide a range of services to end users including electricity, heat, and water. In this analysis, we focus on electric utilities that use gas to generate electric power at natural gas power plants. In the United States, approximately 40% of natural gas consumption is used to generate electric power, with electric utilities responsible for over half of this consumption.⁹ Utilities generate power for the electric grid and manage local distribution. They are compensated by rates charged to customers that are regulated by state or local utility commissions.

Industrial buyers use gas for heat, electric power, and as a key product input or feedstock. US industrial users include the chemicals, oil refining, metals, plastics, and paper industries.¹⁰ Together, industrial users account for approximately 30% of US natural gas consumption directly and about 25% of US power, often concentrated in gas-rich power markets.¹¹

Industrial buyers generate revenue through the sale of their products. Oil and gas inputs are major feedstocks for chemical companies, making them more sensitive to fluctuations in oil and gas prices than the other buyers. Our analysis focuses on chemical companies.

Data centers are indirect buyers of gas and source gas through utilities. Large technology companies (hyperscalers) and other companies building data centers are increasingly driving gas demand due to the high energy supply needed to power 24/7 operations. In the United States, there are several recent examples of new data center campuses that will be powered by new natural gas power facilities (both grid-connected and behind the meter).¹²

Electric utilities: US electric utilities are broadly split into two groups: those that own generation assets and those that only own transmission and distribution assets. Vertically integrated utilities own power generation assets as well as the necessary poles and wires required to deliver power. Utilities have cost-plus financial structures driven primarily by fixed infrastructure investments and rate of return guaranteed by regulators.

Chemical companies: Chemical firms tend to own specialized production facilities. They can also own on-site power generation, co-generation units, and other utility assets. The chemical industry is dependent on oil and gas as feedstocks. Their profit margins are squeezed by upstream and downstream pressures. For example, increases in feedstock prices raise costs for chemical firms, but they cannot pass these costs on because their customers are sensitive to price.

Data centers: Both hyperscalers and data center developers are investing heavily in new data center assets. These investments come with high fixed infrastructure costs. These facilities are also growing in size which makes the companies more sensitive to the variable costs of power.

Exhibit 7

Gas buyers secure revenue in different ways. One challenge to scaling low-leakage gas demand is that each gas buyer has a different business model. While utilities and chemical companies directly purchase gas as feedstock through spot and term contracts, data centers and hyperscalers indirectly purchase gas through utilities.

Hyperscalers may be driving demand for energy as they build out 24/7 data operations, but they are one step removed from the gas procurement chain. Nevertheless, hyperscalers can play a meaningful role in influencing utilities to source low-leakage gas as a means of slashing upstream methane emissions and realizing their aggressive net-zero targets.

Utilities

Revenue model: Utilities recover their operating costs and earn a return on investments through rates charged to customers. The traditional utility business model is anchored by returns on invested capital, also called a rate base, which grows with capital expenditures (capex) into generation, transmission, and distribution assets.¹³ Utilities submit rate plans to public utility commissions where they seek cost recovery including an approved rate of return on those investments. Therefore, utilities essentially have a guaranteed return on their investment.

Gas contracting model: When it comes to gas procurement, utilities employ a range of contract models. Utilities with natural gas-fired power plants purchase gas through contracts or on the spot market. They frequently rely on firm contracts that obligate the producer and pipeline operator to provide the gas when requested. This is complemented by interruptible contracts where the supplier or pipeline operator can interrupt the fuel supply for specific reasons outlined in the contract.

Chemical companies

Revenue model: Chemical companies have historically operated a “linear business model” that depends on selling increased volumes of chemical products to make money. Increasingly, most chemical companies are expanding downstream in their value chains toward more specialized, higher-margin chemical products to decouple profits from volume growth. Products are sold both through supply contracts (ranging term length) and on the spot market. They also generate revenue by selling byproducts from their processes and from licensing fees on company intellectual property.

Gas contracting model: Chemical plants can receive their gas from midstream/pipeline companies or through their local gas utility. They look to respond to fluctuations in gas and liquids prices to lock in the lowest cost feedstocks possible.

Hyperscalers

Revenue model: Hyperscalers make money in a range of ways including through advertising, cloud services, and software. Data center developers generate revenue by leasing the space within their data center to tenants like hyperscalers or other cloud service providers. Data center developers often use long-term (15–20 year) tenant leases to provide stable cashflow.¹⁴

Gas contracting model: Hyperscalers and data center developers are typically indirect buyers of gas. The gas needed to heat or power their facilities is procured through their local utility. The local utility holds the gas supply contract with the upstream supplier.

Utilities, chemical plants, and data centers are some of the key domestic buyers of gas in the United States. But gas is a rapidly globalizing commodity as LNG trade expands.

US liquefaction terminal operators can play the roles of gas buyer, service provider, and seller. Operators source gas from domestic production and liquefy it for export on specialized tankers. Their revenue stream is made up of compensation for gas acquisition, liquefaction and loading services, and LNG sales. Traditionally, LNG sales were structured using long-term contracts indexed to a benchmark oil price. Since the rise of the US export market, LNG long-term contracts are more commonly indexed to a benchmark gas price such as Henry Hub. A smaller amount of LNG is sold on the short-term uncontracted spot market.

LNG volumes are sold to LNG offtakers, who take the gas and transport it to destinations where the LNG can undergo regasification for sale in a new market. Offtakers can be direct consumers of gas, such as a utility or industrial buyer, or financial intermediaries, such as energy trading and marketing companies. International offtakers are often companies with significant state ownership who have a dual commercial and energy security mandate.

Each buyer’s business model dictates what they need to grow low-leakage gas markets.

State-level regulation is a key determinant of a utility’s ability to incorporate upstream methane mitigation into its strategy. In particular, two key factors are a) whether regulation allows for the purchase of low-leakage gas (over other higher-leak gas alternatives), and b) if the public utility commission would approve such purchases even if regulations allow for it. To incorporate methane emissions into their procurement decisions, utilities would need commission support and clarity on how to recover any associated costs. In addition, further harmonization around low-leakage gas standards would increase utility confidence that they are purchasing a recognized product.

The main consideration for a chemical buyer is whether it can procure low-leakage gas at a low premium and credibly claim the benefits in its emissions accounting and disclosure. Chemical companies face minimal decarbonization pressure from the public – their products are spread across long value chains before reaching end-use customers. Therefore, clearer guidance is needed on how to incorporate low-leakage gas in sustainability reporting and emissions target setting by chemical companies.

Hyperscalers’ commitment to emissions reduction targets is a major driver in their approach to sustainable product procurement. Since hyperscalers are key customers of data center developers, developers frequently look for ways to distinguish themselves through sustainability efforts. As with industrial buyers, clearer guidance on how to incorporate low-leakage gas in sustainability reporting, emissions target setting, and reduction claims are key to scaling hyperscaler and data center developer demand.

International gas buyers must balance energy security with emissions reduction targets and regulatory compliance. Similar to domestic industrial gas buyers and hyperscalers, they need clearer guidance on how to credibly claim emissions reductions from low-leakage gas purchases. In addition, they may soon need to meet data transparency standards that importing countries may require on gas sourcing.