Falling Emissions and Falling Prices: Expectations for the Domestic Natural Gas Boom

Current expectations for an increased supply of domestic natural gas have sparked debate about how the changing electricity sector will affect electricity consumers and the environment. The latest round of commentary by Michael Levi focuses on gas’s ability to displace coal generation, and as a result, decrease emissions of greenhouse gases. But Levi suggests that eliminating half of all coal-fired generation is required to meet U.S. obligations by 2020. In fact, forthcoming analysis indicates the U.S. is already on course to meet that goal.

Moreover, the boom in domestic natural gas production could have even more immediate affects for U.S. electricity consumers. The increased supply of gas is expected to lower natural gas prices and retail electricity prices over the next 20 years, according to a new RFF Issue Brief. These price decreases are expected to be even larger if demand for electricity continues on a slow-growth trajectory brought on by the economic downturn and the increased use of energy efficiency.

For example, RFF analysis found that delivered natural gas prices would have been almost 35% higher in 2020 if natural gas supply projections had matched the lower estimates released by the U.S. Energy Information Administration (EIA) in 2009. Instead, with an increased gas supply, consumers can expect to pay $4.9 per MMBtu for delivered natural gas in 2020 instead of $6.6 per MMBtu. These trends are even more exaggerated if demand for electricity were to increase to levels projected by the EIA just three years ago, in 2009.

This decrease in natural gas prices is expected to translate into a decrease in retail electricity prices for most electricity customers in most years out to 2020. Compared to the world with the lower gas supply projections, average national electricity prices are expected to be almost 6% lower, falling from 9.25 cents to 8.75 cents per kilowatt-hour in 2020. Residential, commercial, and industrial customers are all expected to see a price decrease, with the largest price changes occurring in parts of the country that have competitive electricity markets.

All of these prices decreases translate into real savings for most electricity customers. The savings are largest for commercial customers, who stand to save $33.9 Billion (real $2009) under the new gas supply projections in 2020. Residential customers also stand to save big, with estimates of $25.8 Billion (real $2009) in savings projected for 2020.

The increased supply of natural gas has an important effect on greenhouse gas emissions, as Michael Levi discusses. Emissions from the electricity sector would have been roughly 10% higher in 2020 if current projections of natural gas supply and electricity demand had matched those made by the EIA in 2009. But additional emissions reductions are expected to come from regulations under the Clean Air Act and subnational policies. Forthcoming analysis from RFF indicates these efforts will put the United States on target to meet its Copenhagen commitment in 2020, without eliminating 50% of coal-fired electricity generation as Michael Levi suggests is required.

About Blair Beasley

About Matt Woerman

About Dallas Burtraw

Dallas Burtraw is one of the nation’s foremost experts on environmental regulation in the electricity sector. For two decades, he has worked on creating a more efficient and politically rational method for controlling air pollution. He also studies electricity restructuring, competition, and economic deregulation. He is particularly interested in incentive-based approaches for environmental regulation, the most notable of which is a tradable permit system, and recently has studied ways to introduce greater cost-effectiveness into regulation under the Clean Air Act.

Views expressed above are those of the author. Resources for the Future does not take institutional positions on legislative or policy questions. All information contained on Common Resources is intended for informational and educational purposes and may only be used for these purposes. Please see RFF's Terms of Use for further information.

Comments
2 Responses to “Falling Emissions and Falling Prices: Expectations for the Domestic Natural Gas Boom”
  1. Nils Petermann says:

    According to the reference case of EIA’s Annual Energy Outlook, energy-related emissions in 2020 are projected to be 9% lower than 2005. That’s not quite close to the Copenhagen Pledge (17%). And this projection already factors in the shale gas boom and existing efficiency standards.

    Even an alternative AEO case assuming higher gas recovery doesn’t get the reduction beyond 9%. Yes, more natural gas means a lower emissions intensity of electricity, but it also means more demand among industry and buildings due to lower prices.

    So can I assume that RFF’s analysis factors in a pretty significant impact of potential subnational policies and EPA regulations that are not included in the AEO? The AEO generally doesn’t take into account regs that aren’t in force yet.

    • Dallas Burtraw says:

      Yes, thank you. We are not relying on an alternative AEO case. We are relying on ancillary policies under the Clean Air Act and by subnational entities. We estimate this puts the U.S. on course to achieve 16.7 percent reductions from 2005 levels by 2020. Details to follow on a subsequent post.

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