Executive Summary
The U.S. natural gas system faces growing strain amid rising energy demand, driven by electrification, local manufacturing, and data centers. Surging LNG exports are further tying U.S. gas to global markets, increasing volatility and exposing infrastructure limitations.
Bottlenecks, flaring, and inefficient pricing highlight the need for modernization. Borrowing proven strategies from electricity markets such as ERCOT’s real-time co-optimization and DER-driven dynamic pricing can unlock operational efficiencies, environmental benefits, and new revenue streams for all key stakeholders.
This paper outlines a roadmap for applying dynamic pricing and co-optimization to both wholesale and retail gas markets, enabling better investment signals, permitting reform, and a more resilient, sustainable energy future.
The Problem: Flaring, Revenue Loss, and Market Dislocation
Environmental and Economic Costs of Stranded and Flared Gas
In regions such as the Permian Basin (e.g., the Waha Hub), limited takeaway capacity and pipeline bottlenecks leave large volumes of gas stranded. When there is insufficient infrastructure to move gas to market, the result is:
Increased Flaring: Gas is combusted onsite, releasing greenhouse gases and local pollutants wasting a valuable resource and harming the environment. Lost Revenue: Selling at steep discounts or flaring gas directly erodes value for producers, midstream operators, and local communities. Bypassing Pipeline Infrastructure: Off-grid uses (e.g., Bitcoin mining) may monetize some gas but operate independently of the broader gas transportation network, limiting long-term system efficiency and undermining the value of coordinated infrastructure.
Disjointed Pricing: Henry Hub vs. Regional Hubs
Significant and persistent basis spreads between national benchmark Henry Hub and regional hubs like Waha, Houston Ship Channel, and Transco Zone 6 reveal deep market inefficiencies. These differentials are majorly driven by:
Pipeline congestion and infrastructure constraints LNG terminal outages or curtailments Regional oversupply not reaching demand centers
These disconnects drive up system costs, distort infrastructure investment signals, and undermine efficient market development.
The Solution: Modernizing the U.S. Natural Gas System — A Layered Approach
To solve the challenges of flaring, disjointed pricing, and market fragmentation and to unlock the full value of the U.S. natural gas network, we propose a three-layered framework. This approach starts by reinforcing what already works, then adds dynamic pricing and real-time co-optimization, and finally scales through strategic infrastructure investments.
But first, it’s important to understand how proven concepts from electricity markets can be leveraged to modernize the gas system.
How ERCOT and DER Dynamic Pricing Inform Gas Market Design
ERCOT Real-Time Co-Optimization (RTC) operates a five-minute, location-based market that simultaneously optimizes both energy dispatch and ancillary services. Prices reflect real-time system conditions and send clear, actionable signals to participants on where and when their flexibility is needed. ERCOT estimates RTC could have saved the system anywhere between $2.4 - $6.5 billion annually which equates to a 19% reduction in system costs.
Impact: Grid operators minimize cost while maximizing system reliability. Flexible resources are dispatched in tandem with generation, and pricing reflects true system needs.
Dynamic Pricing for Distributed Energy Resources (DERs) empowers end-users like battery owners, industrial facilities, or smart appliances to adjust energy use or inject supply in response to time-varying prices. These prices are often based on real-time congestion and supply availability.
Impact: DERs become tools of system balance, not just passive consumers, unlocking flexible demand without building new infrastructure.
Implication for Natural Gas: By applying these principles to the gas market, we can dynamically price transportation and ancillary services (e.g., PAL, storage, linepack), co-optimize supply with flexibility services, and engage large users or end-customers in system balancing. This would reduce flaring, improve throughput, enhance transparency and lead to significant system cost reduction just as ERCOT has done for electricity.
Layer 1: What Works Today — Existing Strengths of the Pipeline System
The U.S. natural gas transportation system already contains a foundation of operational tools that support day-to-day flexibility and reliability:
Linepack Management: Pipelines use linepack as a buffer to manage short-term supply-demand mismatches. Park & Loan (PAL): Enables temporary balancing by allowing shippers to "park" or "borrow" gas from the pipeline. Interruptible and Firm Services: Provide users with flexible access to capacity depending on reliability needs and pricing. Intra-Day Nominations: Let market participants adjust their flows multiple times per day as conditions evolve. Storage Assets: Salt caverns and depleted reservoirs serve as critical assets for seasonal and hourly balancing in select regions.
Limitation: While valuable, these services are often underutilized due to opaque pricing and a lack of dynamic coordination between market signals and physical operations.
Layer 2: What Can Be Improved — Co-Optimization and Dynamic Pricing
To bring transparency and economic efficiency to the gas system, we must modernize how it operates:
Dynamic Pricing of Transportation and Ancillary Services: Establish near-real-time, location-based prices for PAL, storage, linepack, and balancing. This reveals the true marginal value of each service, improving market liquidity and investment signals. Real-Time Co-Optimization: Borrowing from ERCOT’s RTC model, jointly dispatch gas supply and system services (like linepack and storage) to minimize system-wide costs while meeting reliability needs. Time-of-Use and Location-Based Retail Pricing: Enable large gas consumers to respond to real-time prices—shifting or reducing usage when prices are high, just like DERs do in electricity.
Result: These mechanisms unlock the hidden value of existing services, incentivize efficient system use, reduce emissions, and create price transparency making the gas system more responsive, competitive, and aligned with physical constraints.
Layer 3: What’s Needed to Scale — Strategic Infrastructure Expansion
Modern market tools must be backed by the right physical infrastructure. Strategic, targeted development can close regional gaps and support dynamic market operations:
Strategic Storage Development: High-deliverability storage like salt caverns or LNG peaking units reduces delivery risk and improves system response but must be carefully sited relative to pipeline flows and market needs. Pipeline Upgrades: Looping and compression can ease bottlenecks without new rights-of-way but require commercially viable agreements to justify investment. New Pipelines to Demand-Side Loads: Connecting stranded supply to large demand centers (e.g., data centers, industrial hubs) enhances efficiency and reliability. Permitting reform is critical to reduce delays and uncertainty in project approvals.
Outcome: Strategic investments in storage and transport capacity strengthen market responsiveness, reduce costs, and enable infrastructure to keep pace with evolving demand.
Integrating Gas and Electric Market Co-Optimization
As electrification grows and gas-fired generation becomes the flexible backbone of the power grid, it’s critical that the gas and power markets become operationally and financially coordinated:
Reliable Gas for Power Plants: Co-optimized dispatch ensures generators can secure timely, firm gas supply during ramp events and peak demand—even when pipelines face maintenance or capacity limits. Cross-Market Resilience: Integrated real-time operations reduce fuel availability risks, prevent blackouts, and smooth price volatility during system stress. Informed Investment Signals: Linked gas and power pricing steers capital toward infrastructure that supports decarbonization, resilience, and affordability. Support for the Energy Transition: Coordinated market design facilitates integration of hydrogen, carbon capture, and renewable gas into dispatch systems and infrastructure planning.
Achieving this coordination requires improved alignment between producers, pipelines, and power generators, supported by advances in real-time modeling and strategic storage development.
ESG Benefits: Advancing Sustainability and Social Value
A co-optimized and efficiently priced gas system supports key environmental and social goals:
Reduced Emissions and Flaring Incentives for Carbon Capture and Low-Carbon Fuels Improved Energy Access and Affordability Greater Governance and Market Transparency
These enhancements deliver not only transparent, auditable operational and economic efficiency, but also progress toward national decarbonization and equity objectives.
Regulatory Considerations
Permitting Reform: Streamlined permitting processes are critical for accelerating the development of pipelines and greenfield gas storage—but permitting alone is not enough. Performance-Based Oversight: Market transparency and co-optimization foster a regulatory shift from prescriptive rules to performance-based standards, incentivizing efficiency and reliability. Modernized Tariff Structures: Updating tariffs to support real-time pricing is challenging but essential. Even small reforms can improve market alignment and operational flexibility. Innovation Enablement: Clear, future-oriented regulation will unlock private capital for advanced technologies, including low-carbon fuels, demand response programs, and dynamic pricing platforms.
Conclusion: Energizing Tomorrow—Pipelines with Purpose
Leveraging ERCOT’s Real-Time Co-Optimization and DER-driven dynamic pricing models can materially reduce system inefficiencies in the U.S. natural gas market potentially delivering up to $6.5 billion in annual savings . These mechanisms create transparent, location-based price signals that accelerate permitting, guide capital toward high-value infrastructure, and enable more responsive operations.
In regions where pipeline expansion faces constraints, modular solutions such as high-deliverability storage, small-scale LNG, and virtual pipelines offer scalable alternatives to match dynamic demand.
An integrated, co-optimized market design is critical to:
Balancing rising domestic and export demand Enabling gas-electric operational coordination Supporting grid reliability and decarbonization at scale
The result is a modernized gas system—more flexible, capital-efficient, and resilient, aligned with the demands of today’s evolving energy landscape.
Acknowledgments
Sincere thanks are extended to those who provided valuable feedback and insightful suggestions, which greatly contributed to strengthening this paper. Their expertise and thoughtful review are sincerely appreciated.
Key References
EIA Energy Conference (2015). Value of the Integrated Grid ERCOT (2025). Real-Time Co-Optimization Batteries - General Education . FERC Technical Conference (2016). Intra-day Co-optimization of the Natural Gas and Electric Networks: the GECO Project
