Blog Post

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

Aug 21, 2012 | Dallas Burtraw, Blair Beasley, Matthew Woerman

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.