Author Archives: Richard Meyer

Richard Meyer Low-Income Households Most Vulnerable to DOE Furnace Standard

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.

As I noted in a previous blog post, the rule would put prohibitive installation costs on many consumers, potentially undermine energy efficiency programs and incentives, and lead to higher energy use and emissions from customers induced to switch to less efficient electric equipment.

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.

US Households with Nat Gas Space HeatingBecause 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)

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Richard Meyer Natural Gas Market Indicators: April 15, 2015

A new study from Washington State University shows that methane emissions from U.S. natural gas distribution systems are 70 percent below current Environmental Protection Agency (EPA) estimates of those emissions. Based on data collected from pipeline leaks, meter and regulator stations, and city gates within 13 utility systems across the country, the study’s authors found that emissions from local distribution companies (LDCs) have decreased over the past 20 years due to upgrades, changes in pipeline materials, and better leak detection and survey methods.

As we often report here in the “Market Indicators” blog articles, industry experience and performance exists on a spectrum – one that is often improving in terms of practices and technologies, as well as the regulatory precepts that oversee these activities. This study demonstrates improvements to gas utility system safety and environmental performance, but it is also part of a larger industry trend of better overall performance.

Visit this link to download the full Natural Gas Market Indicators report. Topics covered in this week’s report include: Reported Prices, Weather, Working Gas in Underground Storage, Natural Gas Production, Shale Gas, Rig Counts, Pipeline Imports and Exports, and LNG Markets.

Please direct questions and comments to Chris McGill at cmcgill@aga.org or Richard Meyer at rmeyer@aga.org.

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Richard Meyer Natural Gas Market Indicators: March 27, 2015

After natural gas consumption records were set for the nation as a whole during the first quarter of 2014, the same period in 2015 brought a mixed bag of market observations. Although there was no polar vortex, it did get cold, primarily in the central and eastern U.S. and particularly in February. Consumption in the residential/commercial sector was down about four percent, however, consumption in the power generation sector was up 15 percent for the first quarter of 2015 compared to 2014, even with all of the records set last year.

Some of that demand increase was structural with shifts in the power source energy mix, while some was due to the relatively low and competitive price of natural gas versus coal in the marketplace. The supply picture remains strong today with hundreds of Bcf more working gas remaining in storage compared to March 31, 2014. Domestic production growth seems to be slowing – all indicators of a market seeking balance.

Visit this link to download the full Natural Gas Market Indicators report. Topics covered in this week’s report include: Reported Prices, Weather, Working Gas in Underground Storage, Natural Gas Production, Shale Gas, Rig Counts, Pipeline Imports and Exports, and LNG Markets.

Please direct questions and comments to Chris McGill at cmcgill@aga.org or Richard Meyer at rmeyer@aga.org.

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Richard Meyer New DOE Rules Impose New Costs on Consumers for Little Benefit

AGA_2995 Furnace Standard Infographic_web_FINAL_Page_1On March 12, the U.S. Department of Energy (DOE) proposed a new rule that would raise minimum efficiency standard for natural gas fired furnaces. The rule, if finalized in its current form, would mandate the manufacture of furnaces that meet a 92 percent or higher specification for energy efficiency.

On the surface, the rule appears to be a positive step toward achieving greater energy efficiency. However, a closer examination reveals many problems that conflict with DOE’s stated goal of improved efficiency and reduced emissions. These counterproductive and unintended consequences include:

  • An economic burden on consumers required to bear the prohibitive costs of the expensive equipment and installation.
  • The undermining of efficiency programs and the financial incentives that enable consumers to purchase high-efficiency furnaces.
  • Wasted energy and higher emissions because customers are induced to switch to cheaper equipment, such as electric furnaces, which have a much higher full-fuel-cycle energy and emissions footprint.

Natural gas utilities have a demonstrated track record of supporting efficiency and reducing energy consumption, a fact validated by years of improvements in household natural gas use. This rule would impose new costs on consumers but add little in terms of energy or emissions benefits. Here we explore in more detail some of the consequences of DOE’s action.

AGA_2995 Furnace Standard Infographic_web_FINAL_Page_2Billions of Dollars in New Costs Imposed on Consumers

DOE’s proposed rule would lead to monthly bill reductions – for some homes and businesses. Under the rule customers would bear between $6 and $12 billion dollars in new costs associated with higher efficiency furnaces (a dollar amount that AGA believes DOE is underestimating). And these costs are distributed unevenly. According to DOE’s proposal, one out of every four households that currently have a furnace would pay more over the life of a new furnace, an inequity that can have a disproportionate effect on many low- and fixed-income households.

Despite the high costs of implementation, the rule would generate only modest energy and emissions savings. According to data in the proposal, the furnace standard would lead to only 1.1 percent in energy reduction relative to no action. In turn, the rule will achieve only 0.2 percent in carbon dioxide emissions reductions compared to a case without amended standards. For billions in upfront consumer costs, DOE’s proposed energy and emissions savings are scant.

By contrast, natural gas efficiency programs today already achieve 60 percent more annual emissions reductions at far lower cost than DOE’s proposed rule would accomplish after three decades of implementation. And these savings will only continue to grow as utilities continue to invest in their efficiency programs.

Furnace Standard Undermines Efficiency Program Gains and Emissions Targets

Why are DOE’s proposed energy reductions this small? Any declines come on top of a decades-long trend of energy efficiency that has already substantially reduced natural gas use in homes and businesses. The typical American household uses 50 percent less gas than it did in 1970, meaning the US uses the same amount of natural gas to serve 30 million additional residences. This is due in large part to natural gas utilities that promote energy efficiency in homes and businesses. Ignoring this track record of successful energy efficient approaches, DOE has proposed a costly mandate that achieves only modest savings.

Natural gas utilities across the country promote energy conservation measures, including efficient natural gas furnaces. Through 112 established programs in 39 states, the vast majority of utility efficiency programs offer homeowners financial incentives to purchase and install a high-efficiency gas furnace. These incentives include cash rebates, low-interest loans, and low or no-cost upgrades for low income customers. This proven, comprehensive, customer-focused, and cost-effective approach could be threatened by the proposed DOE rule.

State utility regulators evaluate efficiency programs based on the ratio of its costs to its benefit, such as energy savings. A higher minimum efficiency standard for furnaces would elevate the baseline from which all energy savings are calculated, thus reducing the savings that qualify as a direct benefit of the program. This, coupled with the higher costs of purchasing and installing a 92 percent efficient furnace, may disqualify many furnace replacement programs should they fail the cost-effectiveness threshold that state regulators require.

As mentioned, the energy savings from natural gas utility programs are already achieving more than the savings DOE is projecting in its proposed rule. In 2013 alone (based on the most recent AGA data), utility efficiency programs reduced gas usage in participating homes by 18 percent—the equivalence of twelve days of residential gas consumption.

Furnace Standard Will Cause Higher Emissions and Lower Efficiency for Many Households

What would the effect of the rule be on a typical household? Let’s say a home has a furnace at the end of its usable life, and it fails irreparably. A homeowner will be faced with one of two options:

  • Option 1: Purchase a new gas furnace, at DOE’s stricter efficiency standard, and pay the additional costs of the appliance and installation.
  • Option 2: Switch to less costly equipment such as an electric furnace or heat pump, resulting in increased energy use, higher emissions, and larger monthly energy bills in many areas of the country.

Some consumers that choose Option 1 will see lower overall costs, but not all homeowners or businesses will share in this benefit. Even DOE acknowledges that one in four consumers that replace their furnace will pay more over the life of the equipment because of higher installation costs. The energy savings are just too modest to counterbalance the costs.

In other words, homeowners that today could not justify the purchase of a 92 percent efficient furnace (at least not without gas utility and other incentives) would be forced under DOE’s proposal to make the purchase and eat the costs.

Looking at Option 2, DOE says that 10 percent of consumers will instead switch to an electric furnace or heat pump, which increases emissions and energy use due to the inefficiencies of electricity generation and transmission.  To boot, AGA collected data from contractors that suggests that DOE’s estimate is likely too low – even more customers than DOE expects would be compelled to pull out their furnaces and install an inefficient though less expensive electric appliance. The furnace proposal ostensibly lowers energy use and emissions. This unintended outcome, fully acknowledged by DOE, runs counter to that intent.

Ultimately, DOE’s new standard will impose additional costs on consumers, induce some customers to increase their energy use and grow emissions, and negatively impact efficiency programs that already achieve greater savings than DOE’s proposed rule.

It’s time to re-examine this prescriptive approach and apply a comprehensive vision for furnace efficiency, which recognizes the proven gains from local utility efficiency programs and product choices.

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