Natural gas prices have increased dramatically since 2021, and this also has an impact on electricity prices. The building sector relies on natural gas directly for space heating, and indirectly for power generation. In theory, it would be possible to avoid high gas prices by switching to other energy sources, but there are several factors that make the switch difficult.
Although natural gas is a fossil fuel like oil and coal, its emissions are around 50% lower. For this reason, gas is often regarded as a “transition fuel” in the path towards decarbonization. Many electric companies have been closing power plants fired by oil and coal, while increasing their use of renewable technologies like wind and solar power. Natural gas also had very low prices between 2010 and 2021, creating an incentive to use it. By switching from more polluting fuels to natural gas, building owners and power companies were cutting both their costs and emissions.
Unfortunately, solar panels and wind turbines have a common limitation: you cannot control their energy input, which means you cannot run a grid exclusively with them. Natural gas turbines are characterized by their quick response, and they can easily ramp up production when renewable generation is low. Hydroelectric turbines can also accomplish this role, but they are only viable under specific site conditions. Large-scale batteries can also complement variable renewable sources, but their high cost is still a limiting factor.
Each year, the US Energy Information Administration gathers detailed information about the energy sector, and this includes price information over time. Since 2010, the Henry Hub natural gas spot price had remained below $4.00 per million BTU most of the time:
Gas spot price, USD per million BTU, 2010-2015:
|
Year |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
|
Price per MMBTU |
$4.37 |
$4.00 |
$2.75 |
$3.73 |
$4.37 |
$2.62 |
Gas spot price, USD per million BTU, 2016-2021:
|
Year |
2016 |
2017 |
2018 |
2019 |
2020 |
2021 |
|
Price per MMBTU |
$2.52 |
$2.99 |
$3.15 |
$2.56 |
$2.03 |
$3.89 |
However, energy prices have spiked between 2021 and 2022, and natural gas reached $8.14 per MMBTU in May 2022. This represents an 180% increase from May 2021, when the spot price was only $2.91 per MMBTU. Gas spot prices had not reached the current level since 2008, peaking at $12.69 per MMBTU.
While gas prices remained low and stable, there was a major incentive to use it for power generation and space heating. The US has many power plants that can switch to coal, and this has been a common strategy when gas prices spike. However, since coal has been actively phased out from the power sector in recent years, supply has decreased. With lower demand and environmental regulations limiting its use, there is less incentive to mine coal.
The same price trends have been observed for piped natural gas delivered as utility service, and gas delivered for power generation. The US EIA also provides this data, and there is notable price hike between March 2021 and March 2022:
As mentioned above, gas-fired power plants are characterized by their quick response, which makes them a great option at times when electricity consumption increases suddenly. For example, this tends to happen in the residential sector during the evening, since a large portion of the population is returning home and switching appliances on.
The evening demand peak is impossible to meet with solar panels, since their power generation has already ceased by this time of the day. Wind turbines can help meet the evening demand, but only when wind conditions happen to be favorable at that time of the day. Coal and nuclear power plants can provide a stable output, but they cannot ramp up their production easily in response to peak demand.
There are three main options when the grid needs large amounts of electricity in a short time: large-scale batteries, hydroelectric turbines, and natural gas turbines. However, since batteries are limited by cost and hydroelectricity is limited by location, gas-fired peaker plants are the main option for most US grids.
In the building sector, natural gas has the advantage of being delivered as a utility service by pipe. Other fuels like heating oil and propane must be delivered by truck, and these deliveries can be disrupted more easily by harsh weather and supply chain issues.