Cheap Natural Gas Doesn’t Mean We Should Stop Investing in Alternative Energy

Doing more by using less.
Nov. 15 2012 4:47 PM

The Natural Gas Myth

Yes, it’s cheaper now. That doesn’t mean we should stop investing in alternative energy.

Construction workers walk by the demineralised and raw water tanks.
Construction workers walk by the demineralised and raw water tanks at PGE's new 400 megawatt Port Westward Generating Plant in 2006

Photograph by Greg Wahl-Stephens/Getty Images.

There’s a pernicious argument being made against energy efficiency, and it goes like this. Last winter was one of the warmest on record, so people had to spend less to heat their homes and businesses. That, combined with a “drilling binge ” in shale gas and new production, made for record low natural gas in prices in April, at less than $2 per million British thermal units (MMBtu). This phenomenon has boosted the U.S. economy to the tune of more than$ 100 billion annually, by one estimate.  With such low prices, the thinking goes, investments in alternative energy and energy efficiency don’t make sense.

“All bets are off for the future of energy in the United States and, indeed, the world, as the price of natural gas plummets to ever-lower values,” the University of Virginia’s S. Fred Singer wrote in the American Thinker last spring.  Singer even speculated that “cheap gas will completely remove the need for electricity generated by solar or wind.” In August, a Deloitte study found that current low prices were making many energy efficiency projects less attractive, since it would take too long to show a return on investment.

Indeed, in a “fact sheet” shared recently with Ohio state legislators, the utility FirstEnergy argued that the current energy efficiency mandates don’t make sense anymore. The landscape has “radically changed,” and with the discovery of shale gas resources and low energy prices, “the factors driving the mandates no longer exist.” In Nebraska, one of the worst states in the country for energy efficiency standards, the CEO of the Loup River Public Power District offered the same basic argument last month.

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But these claims don’t hold up under scrutiny, as a September white paper by the American Council for an Energy-Efficient Economy makes abundantly clear. It’s true that in the short term, cheap natural gas makes investments in energy efficiency less profitable and slower to show a financial return. According to ACEEE, natural gas prices start to make energy efficiency infrastructure investments cost effective at about $3 per MMBtu, and really start to make sense economically at $5-$7 per MMBtu. With today’s price of about $3.50, energy companies’ current position appears to make some sense. But there are critical caveats attached to these numbers.

In September, Rocky Mountain Institute’s Amory Lovins and Jon Creyts pointed out that “those who say cheap natural gas is killing alternatives” are “doing the math wrong.” First of all, the actual price that companies pay for natural gas is much higher than the wellhead price (the price of natural gas at the extraction point) being used in cost-comparisons. Furthermore, when the utility companies—which are in the best position to institute energy efficiency measures—argue that the current natural gas wellhead price makes efficiency investments unwise, they’re excluding the transportation costs and the cost of insuring against price volatility. An RMI analysis found that right now, the all-in cost of natural gas is closer to $6-$8 per MMBtu. Not only that, but the wellhead price is predicted to rise to $5-$7 per MMBtu over the next five years. So not only are energy efficiency measures already cost effective, but they’re on track to become even more profitable in the coming years.

More generally, natural gas prices tend to be very volatile. Since energy efficiency measures help lower the demand for electricity, they can help protect companies against price volatility while maintaining the reliability of the electrical grid. Specifically, these measures include reducing electricity consumption, thereby reducing the amount of natural gas used to generate electricity, as well as gas-targeted efficiency programs that directly reduce the end-use of gas for consumers.

“Energy efficiency is a 10-, 20-, 30-year investment,” ACEEE’s Neal Elliot, co-author on the white paper, says. “Prices will go up, prices will do down.” He pointed to a statement from James Rogers, CEO of Duke Energy, on the importance of investing in a range of energy options. “Ben Franklin said there are two certainties in life: death and taxes,“ Rogers said. “To that, I would add the price volatility of natural gas.” Natural gas prices are far more volatile than that of oil prices, making energy efficiency an especially useful bulwark against price instability. And, of course, there are more obvious benefits: Efficiency lowers customers’ utility bills, it’s better for the environment, it creates jobs, and it encourages long-term economic investment.

Adding another variable to this already-complicated picture is the infrastructure currently under development in the United States to ship natural gas internationally. Even though the current glut has resulted in the biggest rise in natural gas exports to Mexico and Canada in four decades, as the Washington Post and Bloomberg News reported earlier this month, the overseas shipping opportunities that will open up in the next two to three years will further change the current landscape. Unlike oil prices, natural gas prices vary on the international marketplace. In Japan, for instance, LNG could be sold at $10 per MMBtu, about three times the U.S. price. Once the U.S. capacity to convert to and export LNG spikes, domestic natural gas prices will adjust up. New fracking regulations may well have the same effect.

The real thorny issue with energy efficiency isn’t low natural gas prices, but the regulatory barriers keeping utility companies from making investments that would lower what their customers pay. Under traditional regulatory models of utility rates, a utility that spends money to reduce energy use for its customers ends up … losing money. If you make more money by producing more energy, why would you work to produce less energy and make less money?

As technology improves and natural gas prices continue to rise, investments in energy efficiency will make more and more sense to utilities. And, one hopes, regulations will get better at realigning incentives for producing less energy. In the meantime, states and other stakeholders should keep pushing for ambitious energy efficiency standards and ignore hot-air arguments about a new era of price stability and the low prices of natural gas.

Jamie Holmes is a Future Tense fellow at the New America Foundation.

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