Lack of Comprehensive Energy Policy May Prove Costly to U.S.

Last week, I attended the annual presentation of the American Gas Association (AGA) to the New York Society of Security Analysts (NYSSA). The AGA represents companies that deliver natural gas to residential, commercial and industrial customers across the U.S. The presentation coincided with the news, as reported in the New York Times and elsewhere, that the Earth had its hottest year on record in 2016 for the third consecutive year. Since natural gas is perceived to be part of the solution to global warming, it makes sense to take stock of industry trends as presented by the AGA.

The AGA noted that the estimated future supply of natural gas (reserves plus resources) in the U.S. was nearly 2,900 trillion cubic feet (TCF) at year-end 2014. This includes roughly 370 TCF of reserves and 2,500 TCF of potential recoverable resources. At the current rate of annual consumption of about 27 TCF, that future supply would last more than 100 years. Estimated future supply has more than doubled over the past two decades, primarily as a result of increased use of hydraulic fracturing in shale formations.  The industry remains optimistic about finding new natural gas formations that would further expand the potential recoverable resource over time.

As a result of the rapid expansion in supply, natural gas prices have come down sharply since 2000. From 2000 to 2009, before the financial crisis, the price of natural gas averaged more than $6 per million BTUs. With the expansion in supply, that average price dropped to about $4 per million BTUs from 2009 to 2014. It has fallen further to around $3 per million BTUs over the past two years. Natural gas costs for commercial customers are now at a 40 year low.

The decline in natural gas has also put more money in the pockets of consumers. The AGA reports that the average household that uses natural gas now saves $874 per year vs. electricity. This amounts to a total annual savings for U.S. consumers of about $50 billion. Besides the drop in price, a lot of the savings has come from decreased use of natural gas, due to improved house insulation and the increased efficiency of appliances, such as boilers and hot water heaters.

This savings for commercial and residential customers has been achieved in part by the growth of infrastructure, especially pipelines, which has facilitated the delivery of natural gas throughout the country. A couple of bottlenecks – in New England and New York – are responsible for natural gas price spikes there during the winter heating season. Otherwise, natural gas prices are reasonably uniform across the U.S.

More infrastructure will be needed to tap into those potential natural gas resources. For example, much of the reserves in the Marcellus shale are not yet accessible due to the lack of pipeline infrastructure. The AGA reported that up to $40 billion of expenditures may be necessary between now and 2030 to ensure constancy of supply. Yet, many citizens resist allowing new pipelines to run through their communities out of safety concerns. This is true despite the strong record of safety that the industry has achieved over many years.

In the near-term, the natural gas industry would like to see demand grow rapidly in order to work down excess inventories. Consequently, many utilities continue to look for ways to expand natural gas use – for example, by converting heating systems in residential and commercial buildings from electricity and oil to natural gas or using compressed natural gas as a fuel in cars, trucks and buses.  Growth in LNG export facilities will also bring down excess natural gas supplies over time.

The low price of natural gas has also prompted most electric utilities to tilt their generation mix more in favor of gas-fired rather than their coal-fired power plants. While the EPA’s Mercury and Air Toxic Standards (MATS) and proposed rules under the Clean Power Plan have prompted many utilities to shutter their older, coal-fired power plants, the low price of natural gas has also made it cheaper to run gas-fired plants. As a result, wholesale power prices have dropped sharply, putting considerable pressure on all other forms of generation, including both coal-fired and nuclear power plants. Renewable energy generating capacity has grown rapidly over the past several years, primarily because of Federal and state tax incentives.

Despite the increase in the resource estimates, we may not be utilizing those existing natural gas reserves as efficiently as possible.  For example, the industry is promoting the expansion of onsite combined heat and power facilities, which utilize natural gas more efficiently.  Although it may be more efficient than burning coal, burning natural gas in large-scale power plants is still not efficient, in part because a lot of electricity is lost in transmission.  Similarly, it is more efficient to use natural gas rather than electricity on site – for example, as a fuel source for household ranges.

With the success in unconventional production methods, like hydraulic fracturing, the U.S. has many more years of supply than it thought it had just a decade ago; but even a 100-year supply is not long when considering the long-term energy needs of the nation.  Despite the bright prospects for expanding supply further, natural gas is a precious, non-renewable resource that should be used as efficiently as possible so that its benefits can be extended to as many future generations as possible.

Although low natural gas prices have helped boost the economy (leaving more money in the pockets of consumers and businesses), they have disrupted electric power markets in ways that could cause more significant dislocations in the future, especially if natural gas prices remain at these low levels. Besides the closing (or announced future closures) of coal-fired power plants, many electric utilities are also now considering closing nuclear plants (which are among the lowest emitters of greenhouse gases).

Under these circumstances (and to state the obvious), it is high time that the Federal government consider adopting a long-term energy policy that would seek to maximize the use of all our energy resources while pursuing simultaneously the goal of reducing greenhouse gas emissions.

As part of this strategy, the government should consider implementing a tax on natural gas consumption in order to raise wholesale power prices and restore a better balance to the economics of electric power production from all fuel sources. Money raised from such a tax could be used, for example, to fund research that conceivably could accelerate the deployment of carbon capture systems to reduce greenhouse gas emissions from coal-fired plants.  Tax funds could also be used to find better solutions to the problem of nuclear fuel rod storage.  This would allow the nation to preserve and possibly even expand its fleet of nuclear power plants.

Such a consumption tax (or similar change in policy) might be abhorred by those who believe in free markets; but without a balanced energy policy, the U.S. may eventually end up with higher energy costs and without a long-term workable solution to the problem of climate change.

January 24, 2017

Stephen P. Percoco
Lark Research, Inc.
839 Dewitt Street
Linden, New Jersey 07036
(908) 448-2246

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