If consumers have noticed their utility bills falling, it may not be a figment of their imagination. Although surging natural gas production in the U.S. has yet to result in lower gasoline prices, it has had one benefit already: curbing or even cutting power costs.
Generating electricity has been made more efficient because of inexpensive and abundant natural gas. The shale gas boom in the U.S. has left the world’s largest economy awash in the power source, which is used by utilities to generate nearly 25 percent of U.S. electricity, according to data from the Edison Electric Institute.
Utilities have traditionally used coal to generate electricity, but the abundance of relatively inexpensive natural gas has given power operators an incentive to shift away from using the black rock, a key contributor to carbon dioxide emissions.
That has created an added benefit in both the residential and commercial use of electricity, observers say. The bounty of shale gas has helped contain electricity prices, which allows power companies to avoid having to pass along higher input costs to the average consumer.
According to a 2012 study by Resources for the Future, an independent research firm, the supply of natural gas “will substantially reduce retail electricity prices over the next 20 years.”
Under various scenarios, the think tank expects the natural gas boom could help spur electricity savings of anywhere between 1.4 and 5.7 percent, depending on the year.
While the RRF says commercial customers will derive the most savings from lower costs – simply because of the sheer amount of electricity they use – all U.S. electricity users can expect to save at least $70 billion through 2020. Over the same time frame, residential consumers may save about $25.8 billion.
“As the price of natural gas falls, the cost of purchasing that natgas, or purchasing the power also falls,” explained Jim Hempstead, senior vice president of global project and infrastructure finance at Moody’s Investors Service.
“Utility companies, all else being equal, will pass on the savings to consumers in lower rates,” he said, adding that electricity bills will be “slightly lower or more flattish.”
The situation is a win-win for all, Hempstead added, because consumers get lower or stable electricity rates, companies can produce more electricity at lower costs, and regulators aren’t forced to crack down on suspected price-gouging.
According to Donald Henschel, a senior market analyst at IHS, utilities that once used natural gas only for “peaking power plants” – operated at times during the day when energy usage was highest – have now switched to broader use of natgas.
Because natural gas is inexpensive, and easier to turn on and off than coal because of its composition, it helps to contain the costs passed along to consumers.
“With natural gas prices coming down so much it’s a viable solution,” Henschel said in an interview. “For base generation [times of the day when power is at an ebb, coal was historically a more affordable solution. Now with natgas so affordable, you can run combined cycle base load generation plants burning natural gas.”
That transition is helped by the rising costs of burning coal, which is being made more expensive by regulations governing clean energy, he added.
There is a risk to that scenario, however. Henschel points out that natural gases could easily spike – which could easily put upward pressure on electricity costs and reverse the virtuous circle. This is not outside the realm of possibility, as natural gas prices have been trending upward since late last year.