Natural Gas Markets: How Federal Agencies Can Reduce Gas Utility Bills

April 20, 2004

Public attention focuses on U.S. natural gas markets in the winter, particularly the impact of projected higher gas prices and possible gas supply shortfalls on the economy. The sharp increase in wholesale prices earlier this year and record low levels of gas in storage have prompted strong statements by Federal Reserve Chairman, Alan Greenspan, warning that "we are not apt to return to earlier periods of relative abundance and low prices any time soon." These comments are mirrored by trends in natural gas forward contracts for the next 3 to 5 years, which are currently trading at nearly twice historical prices.

This trend has implications for consumers, both in terms of their natural gas and electricity bills. Throughout the country, natural gas has been the fuel of choice for virtually all new power plants built over the past decade. As a result, electricity prices are increasingly sensitive to the price of natural gas. While "regulatory lag" will in many cases delay the effect of rising natural gas prices on consumers' electricity bills, a sustained increase in natural gas prices will almost certainly lead to an eventual rise in electricity rates.

Because of the long lead-time needed to develop significant new natural gas supplies and infrastructure, the most promising near-term strategy for putting downward pressure on prices is to reduce natural gas demand. Federal agencies can play a decisive role in responding to this situation by undertaking targeted energy conservation efforts at their facilities. Such efforts can benefit the agencies directly by reducing their exposure to rising electricity and natural gas prices. Agencies can consider a number of general strategies:

• Natural gas efficiency and conservation: The American Council for an Energy Efficient Economy (ACEEE) estimates the cost-effective potential for natural gas efficiency in the U.S. to be approximately one trillion cubic feet per year, equivalent to 4 to 5 percent of current annual consumption. Among commercial and institutional customers, retrofitting HVAC systems and furnaces or boilers, recommissioning, and installing window glazing represent some of the more promising opportunities for reducing natural gas use on site. Facility managers may want to re-examine the economics of projects involving these measures, based on current and projected higher natural gas prices.
  
  
• Electric efficiency and conservation: Throughout most of the U.S., natural gas power plants operate on the margin at least half of the time—and in a number of regions (the West, Southwest, Texas, Florida, and New England), they operate on the margin 80 to 90 percent of the time. Electricity users can therefore indirectly decrease natural gas consumption—and thus help to put downward pressure on prices—by reducing their electricity use, particularly during daytime hours when natural gas is most likely to be the marginal fuel source for electricity generation. In fact, in many cases, electric efficiency efforts provide the "biggest bang for the buck." Federal agencies can build on their reputation as leaders in promoting the efficient use of electricity by engaging in measures such as retrofitting lighting and HVAC systems, installing or recommissioning energy management systems, and establishing energy-smart operational practices.
  
  
• Demand response and load management: In a number of regions, electricity users have the opportunity to receive payment for reducing their electricity use during specific periods by participating in demand response programs offered by the regional grid operator or their electricity provider. Two types of programs are typically offered: "emergency" programs that pay customers to reduce their load during periods when the reliability of the grid is potentially jeopardized, and "economic" programs that give customers the opportunity to offer load curtailments in exchange for market-based payments. The importance of such programs is heightened by the recent run-up in natural gas prices, which is likely to put upward pressure on peak period electricity prices in many parts of the country. By participating in demand response programs, federal customers can help to dampen this effect.

Agencies can leverage their efficiency and demand response efforts with financial and/or technical resources funded through public benefits funds or demand side management programs. These programs have historically been administered by the local utility, although in a number of states (New York, Vermont, Oregon, Wisconsin) the programs are administered by a statewide agency or non-governmental organization.

Current ratepayer funding for electric energy efficiency tops $1 billion annually—providing for a range of resources to federal agencies, from rebates for energy-efficient equipment and retrofits, to facility audits and project evaluation. Funding for natural gas efficiency is also available in many gas utility service territories. Information on those programs most relevant to federal customers is available on the FEMP Web site.

For more information, please contact Charles Goldman of LBNL at 510-486-4637.