Policy Makers - Energy Pricing

The Energy Information Administration (EIA) predicts that demand for energy in the commercial sector is going to grow at an average annual rate of 1.7 percent, reaching 23.2 quadrillion Btu in 2020. Increasing square footage of commercial floor space, plus increased consumption per square footage (due to increased use of computers, office equipment, and telecommunications equipment) is expected raise the demand for energy in the commercial sector at even a faster rate.

Natural Gas Pricing and Availability

Most CHP generation technologies, such as reciprocating engines, combustion turbines and microturbines, use natural gas as a primary fuel. For CHP systems, fuel constitutes the majority of the variable/operating cost. High natural gas prices, such as those experienced in the year 2000, could have negative affects on the CHP market development. However, the EIA predicts that natural gas prices will not remain at the high levels experienced during the winter of 2000-2001.

In an EIA report titled "U.S. Natural Gas Markets: Recent Trends and Prospects for the Future", the EIA identifies several reasons for the natural gas price movement in 2000 among which are significant demand increase following a period of low growth in gas consumption (from 1996 to 1999) and a relatively cold winter in 2000/01.

According to the EIA's "Short Term Energy Outlook - January 2002", natural gas prices are expected to fall through 2002 because of reduced consumption, in part due to this warm winter and the slow economy, and increased supply, in part created in response to shortages in the winter of 2000/01. The EIA predicts that the wellhead price of natural gas in 2002 will be around $2.00 per thousand cubic feet, with prices increasing in 2003 to around $2.60 per thousand cubic feet because of predicted improvements in the economy. Wellhead price of natural gas does not include the costs for transportation and distribution of the gas to commercial customers.

The EIA in their long-term outlook, "Annual Energy Outlook 2002 with Projections to 2020", predict that the wellhead natural gas prices will reach $3.26 per thousand cubic feet by 2020 (EIA Fig. 63). This reflects an average increase of 1.6 percent per year based on the average wellhead price of $2.38 per thousand cubic feet (2000 dollars).

Reference: Annual Energy Outlook 2002 with Projections to 2020, EIA, dated 12/21/01, Gas Prices

Taking into consideration the transportation and distribution cost to commercial customers, the delivered price of natural gas has increased from an annual average of $5.30 per thousand cubic feet in 1999 (when average wellhead price was $2.19 and average City Gate price, that includes transportation but not distribution costs, was $3.34) to an average of about $5.90 per thousand cubic feet in November 2001 (when average wellhead price was $2.74 and the average City Gate price was $4.18).

Increasing prices reflect the rising demand for natural gas; the progression of the discovery process from larger, shallower, and more profitable fields to smaller, deeper, and less profitable ones; and more production from higher cost sources, such as unconventional natural gas. Slower increases in natural gas price increases are predicted because of technological improvements in exploration and production.

The EIA expects that the demand for natural gas will increase at an average annual rate of 2.0 percent, from 22.8 trillion cubic feet in 2000 to 33.8 trillion cubic feet in 2020, primarily due to rapid growth in demand for electricity generation as more base- and mid-load central generating stations are built using natural gas. While the EIA anticipates a decrease in the natural gas reserves in 2002, they expect reserves to increase as rising gas prices slow consumption below production rates.

Reference: Annual Energy Outlook 2002 with Projections to 2020, EIA, dated 12/21/01, Natural Gas Reserves

Electric Pricing and Capacity

The EIA predicts that the average electricity prices (based on total US revenues from sale of electricity divided by total kWh sold) will decline from 6.9 cents per kilowatt-hour in 2000 to 6.5 cents per kilowatt-hour in 2020. Electricity industry restructuring is expected to contribute to the declining prices through reductions in operating and maintenance costs, administrative costs, and other costs. Electricity prices are projected to decline to 6.3 cents per kilowatt-hour by 2006. Prices are then expected to rise from 2015 to 2020 primarily because of increases in natural gas prices, electricity demand (particularly in the commercial sector) and the cost of natural gas margins to electricity generators.

Reference: Annual Energy Outlook 2002 with Projections to 2020, EIA, dated 12/21/01, Electric Prices

Electricity demand is projected to grow by 1.8 percent per year from 2000 through 2020. The most rapid growth is expected for computers, office equipment, and a variety of residential and commercial appliances and equipment.

The cost of producing electricity is a function of fuel costs, operating and maintenance costs, and the cost of capital. According to the EIA in 2000, fuel costs for a 300-megawatt coal-fired unit typically represented about 76 percent of the total operation costs, and for a same size natural-gas-fired combined-cycle unit fuel costs represented about 93 percent. For nuclear power plants, fuel cost are typically a small fraction of the operating cost and therefore are not as sensitive to fuel price variations.

With respect to the impact of natural gas cost on the cost of generating electricity, the EIA predicts that the forecasted fluctuations will be offset by a combination of falling coal prices and stable nuclear fuel costs (EIA Fig. 49). Natural gas prices to electricity suppliers are projected to rise from $2.64 per thousand cubic feet in 2002 to $3.94 in 2020, an average of 2.2 percent per year. The increases in natural gas prices after 2002 are offset by forecasts of declining coal prices, declining capital expenditures, and improved efficiencies for new plants.

Reference: Annual Energy Outlook 2002 with Projections to 2020, EIA, dated 12/21/01, Fuel Prices to Electricity Generators

The EIA predicts that from 2000 to 2020, 355 gigawatts of new generating capacity (excluding cogeneration) will be needed to meet growing demand and to replace retiring units. Of this new capacity, they predict that 88 percent will be natural gas combined-cycle or combustion turbine technology (including distributed generation capacity). A total of 31 gigawatts of new coal-fired generators are projected to account for almost 9 percent of all the capacity growth. Renewable technologies, primarily wind, geothermal, and municipal solid waste units, are predicted to account for 3 percent of the growth. About 19 gigawatts of distributed generation capacity is projected to be added by 2020, as well as a small amount (less than 1 gigawatt) of fuel cell capacity. Oil-fired steam plants are expected to account for very little of the new capacity in the EIA forecast.

NOTE: All of the above information was obtained from the Energy Information Administration website. Unless otherwise noted the information was obtained form the EIA's Annual Energy Outlook 2002 with Projections to 2020.