Natural Gas Power Generation Growth Looks Favorable for Midstream

U.S. natural gas power generation is projected to increase significantly, with developers planning to add 18.7 GW of combined-cycle capacity to the grid by 2028, creating growth opportunities for midstream companies like TC Energy and DT Midstream, which provide crucial infrastructure. This expansion is underpinned by long-term contracts and rising demand, particularly from data centers and power plants transitioning from coal, as exemplified by TC Energy's Northwoods Project and DT Midstream's new lateral pipeline. The Alerian Energy Infrastructure ETF (ENFR), which holds both TC Energy and DT Midstream, offers exposure to this growing midstream segment.

Analysis

The U.S. natural gas power generation sector is poised for significant expansion, with the U.S. Energy Information Administration forecasting the addition of 18.7 gigawatts (GW) of combined-cycle capacity by 2028, of which 4.3 GW is already under construction. This growth trajectory, which includes a notable 1.6 GW planned for 2025, 3.3 GW for 2026 (over half already under construction), another 3.3 GW in 2027, and a substantial 10.6 GW anticipated in 2028 (the most since 2018), presents a considerable tailwind for midstream companies. These entities, operating primarily on fee-based models with long-term contracts that ensure stable and predictable cash flows, are crucial for transporting natural gas to new and existing power plants. Demand is being driven by overall electricity needs, the energy requirements of data centers, and the transition of power plants from coal to natural gas, which has been the leading source of U.S. electricity generation since 2016. Specific examples of midstream companies capitalizing on this trend include TC Energy (TRP CN) with its Northwoods Project, scheduled for service in 2029 and backed by a 20-year take-or-pay contract with an investment-grade counterparty to serve Midwest power demand, and DT Midstream (DTM), which is constructing a lateral pipeline to an Indiana power plant converting from coal to natural gas. This projected growth marks a significant ramp-up from minimal new natural gas capacity additions in the previous year.

Key Decisions for Investors

• Investors should consider evaluating opportunities within the midstream energy sector, given the projected 18.7 GW expansion in U.S. natural gas-fired power generation capacity by 2028 and the associated demand for natural gas transportation infrastructure.
• Focus on midstream companies like TC Energy and DT Midstream that are securing long-term, fee-based contracts for new projects, exemplified by TC Energy's Northwoods Project with its 20-year take-or-pay commitment, as these contracts underpin stable cash flow generation.
• Closely monitor the execution of planned natural gas capacity additions, especially the substantial 10.6 GW anticipated for 2028, as successful project completions are pivotal for the sector's growth trajectory and the performance of focused investment vehicles such as the Alerian Energy Infrastructure ETF (ENFR).