The Impact of Inexpensive Natural Gas
- June 6, 2017
Due to its increased market share and on-the-margin generation, natural gas pricing has a large effect on electricity prices. Its strong market power is the cause of the struggle we have seen for coal and nuclear plants across the United States. The most recent example of natural gas’ direct effect took place just last week, when the Public Service Enterprise Group (PSEG) shut down their final two coal-fired plants in New Jersey. The CEO of PSEG, Ralph Izzo, explained the impact of natural gas prices and the importance of energy efficiency on electricity bills.
The shutdown of New Jersey’s last two coal plants, Mercer and Hudson Generation Station, were announced in October of 2016, just six years after PSEG invested $1 billion into environmental upgrades to the plants. Izzo told the Philadelphia Daily News that these upgrades were decided based on an expectation of higher natural gas prices in the future, which hasn’t materialized. A decade ago, the plants were generating electricity nearly every day. In 2016, however, Mercer was turned on only two days in January to meet high winter demand. Since then, the plant has been inactive for 17 months. Because of this, the price of coal and the operating efficiency of the two plants are not competitive against low-cost natural gas generators. Although environmentalists claim to have had weight in the decision to close down the plants, Bill Thompson, PSEG’s senior director of operations, states “it’s just economics”. Cheap natural gas is flooding the market, making coal generation less efficient and costlier. The CEO of Public Service Electric & Gas (PSE&G), PSEG’s utility arm of the organization, said that the downward trends in commodities on the natural gas side have allowed them to invest more in natural gas infrastructure, keeping customer bills low.
The impact of low natural gas prices can be seen across all of the Northeast. In the past ten years, states in the Northeast have nearly doubled their natural gas electricity generation (from 23% in 2006 to 41% in 2016). The reduction in coal is apparent as well (from 31% in 2006 to 11% in 2016). The EIA attributes these changes to increased access to low-cost natural gas from the Marcellus Shale in Pennsylvania and other regional shale plays.
With the closures of these coal-fired plants, PSEG has announced plans to replace them with natural gas. They have also announced plans to invest over $600 million in a new gas plant in Sewaren, New Jersey, while also looking into the development of new gas plants in Connecticut and Maryland. These plans come after statements made by Izzo at the state energy forum in New Jersey emphasizing the change in consumer demand as energy efficiency becomes a higher priority. Izzo stated, “Customers’ demands are changing, they want more reliability, they want more resilient power, they want cleaner energy and they want access to smart technology to better understand their energy usage – all while keeping their bills affordable.” Izzo’s recommendations for keeping up with consumer demand involve increased use of cleaner energy (natural gas) and state regulatory/rate reforms in the form of efficiency programs.
Contrary to numerous claims against nuclear power, Ralph Izzo emphasized the importance of keeping their two nuclear plants (Salem and Hope Creek) functioning. He claims that they are reliable and offer clean energy with affordable electric bills. Without them, it would lead to higher prices and higher emissions. However, their future with cheap natural gas prices does not look bright, with predictions that they would need government regulation to survive; like we’ve seen with the upstate nukes in New York and their Zero Emission Credit subsidization.
Earlier this year, PSE&G announced they were seeking approval from the state of New Jersey for five energy efficiency programs. The vice president of renewables and energy solutions at PSE&G, Courtney McCormick, calls energy efficiency “the lowest cost energy resource.” With the implementation of energy efficiency programs in more facilities, it is easier to track and adjust for energy demand and consumption. While inexpensive natural gas plays a large role in electricity prices, energy efficiency remains the most valuable tool in ensuring low utility bills. As Ralph Izzo said, “the cheapest kilowatt remains the one that is not needed.”
To learn more about how you can reduce consumption and demand, measure & verify efficiency projects, and implement procurement strategies to maximize ROI, contact us or schedule a demo of our watchwire utility data management platform.
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