Escalating Iran conflict tightens global gas supply, increasing US power price risk and reshaping PPA valuations.
The escalating war involving the US, Israel, and Iran is increasing the risk that global energy supply disruptions will spill into US natural gas markets and, in turn, into wholesale power prices that underpin PPA valuations.
As of 18 March, the conflict has entered its fourth week, with attacks and retaliatory threats increasingly focused on oil and gas infrastructure across the Gulf. Qatar has already halted LNG production and liquefaction and declared force majeure on shipments, abruptly removing the world’s second-largest exporter from the global market. The conflict has also significantly threatened the movement of oil and gas through the Strait of Hormuz, a critical transit route for about one-fifth of global LNG trade.
These developments have sharply repriced natural gas risk. Gas markets are more on edge today than at any point since Russia’s 2022 invasion of Ukraine, when US gas prices spiked to the highest levels in over a decade. Overseas, Europe’s benchmark gas price, front-month TTF, surged to three-year highs, and prices initially doubled week over week. Near-term US gas prices have moved far less dramatically, but forward price expectations indicate more significant increases over the medium term. This may have a significant impact on PPA performance and valuations across the country. For renewable developers and offtakers navigating the PPA market, these developments introduce both new risks and opportunities.
Natural gas pricing is critical to track because gas remains the dominant marginal fuel in many US wholesale power markets. Gas-fired plants convert natural gas into electricity at a specific efficiency ratio, commonly referred to as a “heat rate.” For example, if gas costs 3 USD/MMBtu and a facility converts that to electricity at a 7x heat rate, the plant will offer electricity at least at 21 USD/MWh into the wholesale power market. Since wholesale power markets are dominated by gas-fired generation, these facilities often set the marginal price of electricity. In PJM, for example, gas-fired plants now account for over 40% of total generation, up from about 25% a decade ago. As a result, gas-fired generation is setting the marginal power price roughly 80% of the time today, compared to just 40% ten years ago. Historically, power prices in gas-heavy regions have often correlated closely with natural gas prices, leading some traders to use long-dated natural gas futures as a proxy hedge when power market liquidity is limited.
In summary, gas prices feed directly into spot power prices, power forward pricing, and long-term third-party assessments of merchant power prices, all of which form the foundation for valuing renewable contracts such as PPAs. As such, a sustained geopolitical premium in gas can materially affect renewable contract economics. This matters more today than in prior years because the US is far more exposed to global gas dynamics through LNG exports than it once was. Russia’s war with Ukraine offers an earlier example of how US gas and power prices can become more exposed to global events. After Russia’s invasion, Europe scrambled to replace Russian gas with LNG, sending overseas LNG prices sharply higher and increasing demand for US cargoes. However, Reuters and EIA reports show that the US has little spare LNG capacity available in the near term, with most facilities already running near full capacity and much of their output contractually committed. With little room to materially increase exports, US suppliers have limited ability to replace lost Qatari cargoes immediately, which may help dampen further near-term price gains in the US. However, export capacity is expected to grow substantially over the next several years. The US has been the world’s leading LNG exporter since 2022, and the EIA expects US LNG export capacity to nearly double by 2031 relative to December 2025 levels. As that capacity expands, the ability to respond quickly to global demand spikes will allow more gas to be diverted from domestic to international markets, deepening the long-run connection between global gas shocks and domestic power pricing.
Comments from President Donald Trump are being watched closely and continue to move markets. His recent suggestion that the war may end “soon” appeared to calm energy markets temporarily, with Brent crude retreating after an initial surge that pushed it to about 110 USD/barrel. For now, the immediate impact on US gas, power, and PPA valuations has been limited. But that relative calm may prove misleading. As of 18 March, the CME Henry Hub futures strip is already pricing in materially higher domestic gas prices over the coming quarters, rising from about 3.19 USD/MMBtu for April 2026 delivery to roughly 4.95 USD/MMBtu in December 2026 and 5.40 USD/MMBtu in January 2027.
For renewable developers, offtakers, and investors, the takeaway is straightforward: geopolitical risk is no longer just a foreign policy or oil market story. It is increasingly a US power market story, with direct implications for forward curves, merchant risk, and the value of PPAs.
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