With a 5-4 ruling, the Supreme Court of the United States remanded to a lower court the EPA Mercury and Air Toxic Standards (MATS) rule that would limit pollution from coal-fired power plants. The Court said that the EPA did not properly account for the costs of the rule when determining emissions standards and needs to do so. The ruling may have larger implications for future rulemakings under the Clean Air Act, but one question remains for these observations of the gas market: how much have expectations for MATS already been baked into the electricity system. In other words, will this ruling do much to reverse existing trends with coal-fired power?
The natural gas market today is supplying nearly 20 percent more natural gas to power generators than last July. In fact, EIA data on electric generation share by fuel for April showed that natural gas overtook coal for the first time ever – natural gas with nearly 32 percent compared with coal’s 30 percent. Part of the reason is price. The spot at Henry Hub is nearly $1.70 per MMBtu below last year. But part of the reason is structural. Compliance with the EPA MATS began in April and analysts expected between 13 and 20 GW of coal-fired power plants to be either retired or repowered in 2015 alone. Some of the shift has already occurred and is contributing, at least in part, to the gas volumes to power generation. Does this market transformation render the Supreme Courts’ decision moot?
After three straight weeks of triple digit working gas injections, net volumes to storage cooled slightly to 89 Bcf for the week ending June 6, 2015, then 75 Bcf one week later. At 2,508 Bcf underground storage continues to build above the five year average (+1.4 percent) and strongly exceeds the year-over-year storage position by 38 percent. Continuing a pace for injections that exceeds 80 Bcf per week will mean that working gas inventories would reach 4 Tcf by the start of the 2015-2016 winter heating season for the first time ever.
With natural gas abundance, particularly in the eastern United States, has come the need to reorient pipeline infrastructure and assets based on connecting burgeoning supply areas with demand locations. One of those possibilities launched a recent open season as Kinder Morgan reached out with its Utica Marcellus Texas pipeline, which is principally designed to carry propane, butanes, natural gasoline and condensate from the eastern U.S. to the Texas Gulf Coast. It isn’t a natural gas pipeline per se, however, the health of gas production in the Utica and Marcellus shale areas may be dependent on the development of midstream and pipeline infrastructure that moves liquids and gas from the supply rich areas pushing back on more traditional transportation corridors. This particular project will require the conversion of nearly 1,000 miles of gas pipeline to a liquids pipeline.
The release of the nearly 1,000 page EPA study on hydraulic fracturing and drinking water begs the question, “what will be next?” Perhaps the environmental focal point will shift to continued analysis of methane emissions within the value chain. Only time will tell.
Natural gas acquisition prices are currently quite modest and the domestic storage position is back to more normal. In fact, from the end of May through the balance of the traditional net injection season daily injections would only have to average about 11.5 Bcf per day to bring national inventories to 4 Tcf entering the winter for the first time in history. Production fundamentals and requirements for natural gas to serve cooling loads will make that determination as the summer progresses.
In March, the U.S. Department of Energy (DOE) proposed a rule that would mandate the manufacture of natural gas furnaces that meet a 92 percent or higher specification for energy efficiency. At first glance, the rule appears to be a positive step forward for energy efficiency. In reality, DOE’s proposal would create a number of counterproductive and unintended consequences that could increase energy use.
In this post, I want to focus on the economic burden placed on consumers and in particular low-income households, which are disproportionately vulnerable to higher costs.*
On April 13, DOE held a public meeting on the proposed rule. In its response to concerns about how the rule will affect low-income households, DOE stated that “most low income households are tenants.”
DOE’s argument is that property owners, not renters, are responsible for the higher upfront costs of a furnace installation. Tenants do not have to cover the costs of a higher efficiency furnace, but would enjoy the lower fuel savings. Consequently, low-income households, most of which DOE says are renters, are insulated from the higher costs imposed by DOE’s rule.
Except this is not true. An analysis of US Census data** shows that 53 percent of low-income natural gas households are owner-occupied. Less than half are renters. In fact, 1 out of 7 U.S. households is low-income with a natural gas furnace.
This means up to 9 million low-income home owners with a natural gas furnace would be faced with higher upfront costs imposed under DOE’s rule.
Because low-income households have fewer resources to pay for the installation of a higher-efficiency gas furnace, they are more likely to switch to less-expensive electric equipment that costs more to operate. This, in turn, means low-income households are more likely than other homes to see higher utility bills under DOE’s rule.
Even renters could pay more. If a property owner cannot or chooses not to cover the upfront costs of a furnace installation, they may make a switch to less efficient equipment, in which case fuel costs will go up. Many renters pay separate utility bills (myself included). Landlords of these properties don’t see operating costs, so they don’t directly benefit from an upgraded furnace.
Ironically, even the study that DOE cited notes that rental units are less likely to have efficient equipment. In fact, it’s this principal-agent problem that stymies a lot of energy efficiency potential. Are we to just assume, as DOE does, that no landlords will switch to lower-cost electric equipment?
The disproportionate effect of higher costs is one reason why 71 percent of gas utility efficiency programs target low-income customers.
The rule may have a pernicious secondary effect on low-income assistance. Each year, through the Low Income Home Energy Assistance Program (LIHEAP), the Federal government assists the most vulnerable households to meet heating and cooling needs. But the program is stretched already.
Current LIHEAP funding leaves 4 out of 5 eligible households without assistance. The furnace rule could exacerbate this condition. If this rule induces customers to switch to higher cost heating fuels, the requirements of a low-income program like LIHEAP will increase, putting further strain on the program.
Industry concerns about this rule are not about taking a position against energy efficiency. Natural gas utilities have a demonstrated track record of supporting efficiency and reducing household gas consumption. Rather, it’s about re-examining a top-down prescriptive approach and instead applying a comprehensive vision for furnace efficiency, one that recognizes proven approaches that are cost-effective and protects all customers.
*Here’s a rundown on the costs. A 92 percent efficient furnace costs roughly $300 more than unit rated at 80 percent, which is the mandated minimum today. However, the installation cost of these higher-efficiency furnaces be in excess of $1000 to $4000 more, a result of new venting requirements that may be difficult or impossible in some homes.
**AGA analysis of the U.S. American Community Survey, 5-Year 2009-2013 multi-year combination microdata files, accessed via DataFerrett. The summary table shows the breakdown of occupied households with natural gas space heating by tenure and income level (using $45,622 as the low-income threshold)