Sales of U.S. "freedom gas" are on track to smash volume and earnings records in 2022, but the stellar short-term gains for exporters may have long-term consequences for the entire U.S. energy sector due to the resulting higher natural gas prices.

Total U.S. LNG exports jumped nearly 11% in the first 10 months of 2022 from the same period in 2021, Kpler data shows, but soared nearly 150% to Europe as desperate buyers there paid top dollar to replace reduced Russian pipelined supplies.

Revenues from that export bonanza have been equally eye-catching, topping $25 billion through July, according to the latest data from the U.S. Energy Information Administration (EIA), compared with just over $13 billion in the same slot in 2021.

Those higher European purchases have affected far more than just the gas exporters who raked in record profits.

The entire U.S. power market has been churned by the resulting rise in domestic gas costs, which have averaged 85% more through October than in the same period last year.

That has not only added to inflationary woes for American households and industry but has also made power produced from renewable sources look cheaper - and more attractive - than ever.

The administration of former president Donald Trump touted U.S. LNG as “freedom gas” that gives Europe an alternative to Russian supply.

Dominant fuel

Natural gas is by far the largest power source in the United States, accounting for 37.1% of power generation across the Lower 48 states through Oct. 24, EIA data shows.

U.S. gas production is on track to surpass 2021's record tally of 34.5 Tcf this year, with so-called dry natural gas output through July running 3.8% above the same point in 2021.

However, that higher output pace has been dwarfed by the growth in total U.S. natural gas exports, which climbed by 7.1% over the same period thanks to a 14.3% surge in LNG shipments.

Domestic gas demand has also outgrown production, climbing nearly 5% in the opening seven months of 2022 and leading to a tightening in the overall U.S. gas market despite the record output pace.

Knock on

As the brisk LNG export pace and uptick in local use resulted in reduced supplies for domestic consumers, U.S. gas prices have trended higher, averaging $6.60/MMBtu through Oct. 24 compared with $3.56 for the same period last year.

Forward markets suggest prices will stay elevated well into 2023, with benchmark prices for LNG in Asia holding sharply above U.S. domestic prices through the end of next year, presenting sustained profit-making opportunities for LNG exporters.

At the same time, however, the sustained stretch of above-normal gas prices is likely to spur substitution toward lower-cost alternatives by utilities, households and businesses alike.

According to the EIA's Annual Energy Outlook for 2022, which estimated costs for electricity from new facilities entering service in 2024, the levelized cost of electricity from a natural gas plant already exceeded that from onshore wind and standalone solar installations.

Since the report's publication in March, natural gas prices have pushed more than 20% higher, while the outlook for renewable energy supply has sharply increased thanks to aggressive new government support for clean energy projects in the recently passed Inflation Reduction Act.

Indeed, the combination of sizeable government subsidies for clean energy supplies and the prevailing high cost of power from natural gas are likely to accelerate power-source switching in a variety of ways.

For utilities with flexibility in their power mix, that may result in increased production of lower-cost renewable power in electricity generation, which once developed may eat in to the amount of natural gas they require.

For homeowners, that may take the form of installing solar panels or heat pumps that reduce overall energy needs.

And for companies - especially power-intensive but cost-sensitive manufacturers - that may result in the installation of new power sources that reduce their overall energy requirements from the local grid.

In combination, these changes have the potential to permanently alter the American power supply market by reducing the volumes of natural gas used at home and by increasing the amount of renewable energy supplied.

That could leave U.S. gas exporters free to peddle even greater amounts of "freedom gas" to the world's needy buyers, who for the coming year at least look willing to pay well above the American domestic gas price.

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