Why High Natural Gas Prices Are So Spooky This Halloween

October 28, 2021
American Petroleum Institute
Joseph Daniel
Senior Energy Analyst

There is no good news here. Not even a silver lining. Just scary bad news that will ruin your day.

Why?

Because natural gas prices are high.

Last year, natural gas prices bottomed out at $1.50 per 1 million British Thermal Units (MMBtu), which wasn’t high enough to sustain production. Companies throttled back production and were caught flat-footed when the economy began to recover and demand returned in the United States and abroad. How long natural gas prices are expected to remain elevated is uncertain, but based on commodity futures markets and energy forecasts, it is likely that they will remain high through this winter. When families begin to turn on their gas furnaces to heat their homes, those high gas prices are going to translate into big heating bills.

And even if you don’t have a gas furnace, if your heat source is powered by electricity, then you can still expect higher home energy bills. That’s because natural gas is still a very big part of the electric grid. Gas-fired power plants represent the largest single source of electricity capacity and energy nationwide.

That means that when gas prices go up, the cost to generate electricity goes up. And while how much those increased costs will translate into higher costs on your electric bill remains to be seen, you better believe the utility that provides you with electricity is going to want to recover any increased costs they incur.

According to the US Energy Information Administration (EIA):

  • Nearly half of US households that heat primarily with natural gas will spend 30 percent more than they spent last winter on average—50 percent more if the winter is 10 percent colder-than-average and 22 percent more if the winter is 10 percent warmer than average.
  • 41 percent of US households that heat primarily with electricity will spend 6 percent more—15 percent more in a colder winter and 4 percent more in a warmer winter.

Higher emissions are scary, too

Higher energy costs are scary enough, but unfortunately, that’s not the only bad news high gas prices bring. Higher gas prices also mean more coal generation, which means more pollution that will lead to increased asthma rates and heart attacks, and exacerbate climate change.

Here’s how. Grid operators are supposed to operate power plants in what is called “merit order,” or from lowest cost to highest cost. This makes sense in purely economic terms: You want to rely on the lowest-cost resources first and most often and only rely on higher-cost resources when necessary. In 2020, when gas prices were at around $2/MMBtu, most gas-fired power plants were less expensive than even the lowest-cost coal plants, which meant grid operators relied on as much gas-fired power as possible. As gas prices increase (they are currently at $5/MMBtu and expected to stay that high through winter) gas-fired power becomes more expensive and the grid relies on other sources of electricity. It’s not that coal got any cheaper; it’s just that gas is more expensive. (And part of that is the fact we don’t internalize the cost of coal pollution—both its direct effects on human health and its contribution to climate change.)

The EIA and others have already observed a recent uptick in coal generation (and corresponding emissions) and the EIA’s short-term energy outlook projects that coal generation will close out 2021 18 percent above where it was in 2020 and remain elevated in 2022.

It’s even worse overseas

These problems don’t stop at the water’s edge. In fact, they are even worse in places such as Europe where high gas prices are forcing some power generators to switch to diesel as a fuel source. High prices have also forced fertilizer plants in the United Kingdom to shut down, which is creating serious concerns about long-term ripple effects. In China, which is suffering from both a coal shortage and gas price spikes, the government has instituted an electricity rationing program that is forcing factories to close. All of this is compounding pre-existing supply chain problems.

A tarnished silver lining

In theory, high gas prices make other alternatives, not just coal, look more economical. So, one might expect that the recent uptick in gas prices has made building gas plants less attractive and building resources like wind or solar (which have no fuel costs) look a lot more attractive. It’s possible we’ve seen some examples of that, such as when Xcel Energy in Minnesota decided to back down from building a gas-fired power plant that would have operated quite often and instead opted for building gas “peaker” plants (that have their own problems, but would presumably be run far less often).

But there seem to be far more examples of doubling down on gas-fired power, despite the recent price spike. For example, the largest utility in Kansas, Evergy, conducted an integrated resource plan (IRP). The IRP had lots of shortcomings related to equity and inclusion, but the technical analysis wasn’t bad, which probably contributed to the company charting a path that included shutting down coal and building lots of renewables. However, sometime after the analysis was complete, but before the IRP process was complete, the company changed course and decided to convert the coal plant to gas and slow down its build-out of renewables.

It doesn’t have to be this way

So, what’s a better way out of situations like these? Well, one way is to get tangled up in all sorts of complex financial tools, such as price hedging, to help insulate against price shocks. But there is an even better, simpler way: invest in fuel-free alternatives. Wind, solar, and energy efficiency don’t need fuel, so they don’t have fuel costs that are subject to price volatility like gas (and oil, and coal, for that matter).

About the author

More from Joseph

Joseph Daniel is a senior energy analyst and manager of electricity markets with the Climate & Energy program at the Union of Concerned Scientists. In his role, he serves as the primary point person for coordinating UCS’s utility regulatory work at state public utility commissions, independent system operators, and the federal energy regulatory commission.