Natural Gas: Foundational to U.S. Electricity Generation

Dean Foreman
Posted September 9, 2019

One of the things I do often on behalf of API is to speak publicly across the United States, emphasizing how the energy revolution has continued to benefit consumers. On the topic of natural gas and electricity generation, a common thread has emerged: Natural gas has generally led to lower energy-related carbon dioxide emissions and lower electricity prices across the nation.

To those who follow the industry, this may be no surprise given that clean natural gas has supplanted coal as the leading energy source for generating electricity in the U.S.  Part of this is natural gas’ competitiveness in the marketplace. Thanks in part to the shale revolution, real natural gas prices at Henry Hub decreased 37% between 2010 and 2018 – and as of August 2019 were down by another 15.6% y/y. 

For many consumers, however, the combination of complex electricity rate plans – which can involve steps or tiers, time of use or seasonal price variation, and various surcharges and taxes – is opaque. This means the price per kilowatt hour that appears on our monthly utility bills may be hard to tell from both the bill’s bottom line as well as the wholesale prices of the inputs used to generate electricity.

One way to help with that opaqueness is to bring it back to basics. When we compare which states saw their average real electricity rates increase or decrease between 2010 and 2018, an elegant pattern emerged (API Team calculations based on the U.S. Energy Information Administration’s State Energy Data System):

• Electricity prices decreased in the majority of states that increased their share of natural gas-fired generation relatively more than they increased their share of wind and solar generation combined. 

• Conversely, electricity prices increased in majority of states that increased their share of wind and solar generation relatively more than they increased their share of natural gas generation. 

This reminds us of the economics maxim that “there is no free lunch” – in that generating electricity from sources that have been relatively less or more expensive has generally passed through to consumers. And consumers really ought to know and care, since the average U.S. household spends more than $1,400 per year on electricity, according to the Bureau of Labor Statistics.

Again, the bottom line: Natural gas remains the cost-competitive and reliable leader in fueling electricity generation across the entire nation.   

Basic economics is not always at the forefront of the debate over the fuel mix in electricity generation, particularly in talking about wind and solar.  The cost range for wind and solar can be competitive with natural gas but also varies widely at the same time as those sources have continued to be subsidized.

For example, a recent report by the World Resources Institute (WRI) suggested based on EIA projections that wind and solar will be the fastest-growing sources of new capacity and should continue to come down in cost.  Based additionally on analysis by Lazard, WRI compares the levelized cost of energy (LCOE) among alternative sources for electricity generation and, while noting this is just one view, argues it is consistent with the direction of recent power purchase agreements.  However, intermittency of wind and solar and, for example, varying intensities of the sun and the strength of the wind across each of the states mean that the amount of capacity that technically has been added may not correspond precisely with changes in the mix of net generation.  Let’s look at the generation activity.

A snapshot of total U.S. net electricity generation follows from the Energy Information Administration (EIA). In 2018, the energy generation mix included natural gas (35%), coal (27%), nuclear (19%), hydro (7%), wind (6%), utility-scale solar (1.6%), biomass (1.5%) and oil (1%).  Since 2010, coal lost 17% market share in U.S. electricity generation, and this was largely offset in share gains by natural gas (11%), wind (4%) and solar (1.6%).  Although wind and solar grew faster than natural gas in percentage terms, they began from relatively small starting amounts, so natural gas quietly contributed the most to supplanting coal and lowering carbon dioxide emissions in power generation between 2010 and 2018.

Separately, even though many factors contribute to retail electricity prices, one might expect that using more natural gas-fired generation between 2010 and 2018 (again, as real natural gas prices fell by 7%) would translate into lower rates to consumers, other things being equal.  And this generally has been true. According to EIA data covering all end-user consumer sectors, the average electricity price fell by 6.5% between 2010 and 2018, adjusted for price inflation.

In 2018, state average electricity rates varied from as low as 7.65 cents per kilowatt hour in Louisiana to a high of 29.22 cents per kilowatt hour in Hawaii. By region, Pacific states were the second highest behind New England, which had the nation’s highest average electricity prices at 17.53 cents per kilowatt hour – largely because that the region has neglected to invest in pipeline infrastructure needed to take advantage of low-cost natural gas from neighboring Pennsylvania and Ohio.

Now, back to the pattern we mentioned in the bullet points above – about average real electricity rates and whether states added more natural gas-fueled generation than renewables or the other way around.  

The first chart below shows that more than three-quarters of the states that added more natural gas generation than renewable generation between 2010 and 2018 saw real price decreases. Over the same period, in states where real electricity prices increased, more than three quarters those added more wind and solar generation than natural gas generation.

Although the upper left and lower right quadrants of the chart accounted for 34 of the 50 states, there were some exceptions. For example, 11 states, including several in the West and Southwest, added relatively more wind and solar electricity generation than natural gas generation and saw lower electricity prices between 2010 and 2018.  For example, wind gained the greatest share of generation in Texas and Oklahoma, while solar was the pacesetter in New Mexico.  In fact, most states in the lower left quadrant of the chart are ones at-a-glance where wind or solar should be highly effective even if natural gas is as well.  Maine also falls into the lower left quadrant but is an outlier where the driver was electricity imports that more than doubled over the period.  In general, as sources appeared to be cost-effective in these states, they contributed to lower electricity prices.

There also were five states that saw their real electricity rates rise despite adding a relatively greater share of natural gas generation. This could reflect many factors, including the need for infrastructure improvements as well as the efficacy of state regulation. Two states that stand out here appear poised to see further rate increases by the same utility, as noted for Indiana and Kentucky.

Although one size does not fit all, it is remarkable that more than three quarters of states were aligned in that utilizing relatively more of the most cost-effective generation source led to lower electricity prices, while adding more high-cost sources into the mix led to higher electricity rates.  So, if your state is not one where wind or solar are the most cost-effective source, you could have more of it – but likely at the cost of higher rates. 

The next thing we examined is whether states with economies that are relatively more dependent on energy – with greater shares of state GDP coming from agriculture, construction, mining, manufacturing, trade, transportation and utilities – tended to have lower electricity rates, and vice versa.

In this comparison, 41 of the 50 states lined up into the expected upper left and lower right quadrants of the chart. This is probably best interpreted as saying states that historically have been endowed with cost-effective energy have economies that grew to take advantage of it.

The nexus between the comparisons suggests that, as a broader array of states with above-average energy-sensitive shares of GDP (calculated as the 2018 share nominal GDP in agriculture, construction, mining, manufacturing, trade, transportation and utilities) above the U.S. average push to add wind and solar generation into the mix, neglecting to add generation resources that are cost-effective could result in higher electricity prices that ultimately affect consumers as well as a state’s growth and competitiveness.

We continue to see through EIA reports how solid electricity generation additions to capacity and net generation so far in 2019 suggest natural gas has remained foundational to electricity generation. As we’ve already discussed, many factors can affect electricity rates, and the past is not necessarily indicative of the future. It is nonetheless striking how the majority of states have aligned over time with these comparisons, before and after the U.S. energy revolution.