Analysis: EPA greenhouse gas rule may lay new bet on future natural gas supplies

The Obama administration’s ambitious plan to reduce greenhouse gas emissions from U.S. power plants 30% by 2030 is laying another big bet on future U.S. natural gas supplies.

The boom in U.S. production, the result of hydraulic fracturing and horizontal drilling into shale formations, has sharply boosted the availability of gas since 2009, but the abundance has prompted multiple new claims to the resource.

The Environmental Protection Agency is preparing two new rules that will weigh heavily on U.S. coal-fired generating plants. The rule on reducing greenhouse gases will be difficult for many, if not all, of the U.S. coal plants to satisfy. And already a massive wave of retirements of coal-fired plants is occurring as the EPA’s rule on mercury and acid gases is implemented over the next year.

The U.S. will grow increasingly dependent on natural gas to make up the difference, even with the most ambitious efforts to control the growth of demand and promote more costly renewable power.

Throughout history, natural gas has been among the most volatile fuels available, owing to changes in demand but also to the difficulty of storing large amounts of it. If natural gas prices spike, as many U.S. experts worry, the growing dependence of the U.S. on the fuel for power plants will take electricity along on the ride.

After the fracking boom began producing large volumes of new gas, an over-abundance of the fuel drove down prices from $11.78 per thousand cubic feet in July 2008 to $2.04 in April 2012, according to the U.S. Energy Information Agency. Those are average monthly prices, and the daily spot market price swings were even higher.

Where did it go from 2012? That’s the worrisome news. The price has since rebounded $4.61 in trading Monday. Even at the current price, the affect on electricity prices is noteworthy.

Last month, PJM, the operator of the grid from the East Coast all the way to Chicago, warned that in auctions for power supply contracts prices in some areas were doubling. And the California Independent System Operator, which operates the grid for all of the investor owned utilities in the state, reported that last year spot market prices in the state shot up 31%.

The surge has caught savvy investor’s attention. The prices of utility shares and funds are rising, as investors sense the potential for profit spikes as the price of electricity increases.

Electricity and natural gas have become joined at the hip. Stanford University energy expert James Sweeny notes that a 33% increase in natural gas yields a 16% increase in the retail price of electricity.

“When those natural gas prices start going up again, we will feel it in the way of higher electricity prices,” Sweeny said.

Just how high power prices will go is difficult to say. Malcolm Johnson, a former Shell Oil gas executive who now teaches at the Oxford Princeton Program, a private energy training company, said prices could move toward European price levels of $10. Such a move would still make the U.S. a bargain against Asian prices of more than $20.

Is there room for concern? A number of U.S. experts say the government and industry are making multiple claims on the resource, potentially outstripping future growth. The Energy Department projects that U.S. natural gas supplies will double in coming decades, but that has triggered a lot of ambitious plans for its use.

U.S. companies have submitted plans to build more than 20 liquified natural gas facilities along the coasts, a massive amount of export capacity. Meanwhile, the trucking industry is slowly converting its fleet to burn cheaper natural gas and is counting on U.S. heavy engine manufacturers to continue improving the efficiency of natural gas engines over traditional diesel.

But the big wild card may be electricity.

Natural gas will be needed not only to replace coal-fired generating plants but also to make up for almost every other type of fuel. The U.S. has retired five nuclear reactors since 2013, and the industry is considering even more shutdowns. The prolonged drought is reducing hydropower in much of the West. And even renewable power needs natural gas-fired plants as a backup resource.

Although conservationists hope that regional networks will help improve the reliability of wind and solar resources, it is still too variable to count on. In Kansas, for example, regulators count on only 11% of the large installed wind turbine base without having fossil fuel backup.

As the California electricity crisis of 2000 showed, when electricity is in short supply prices are subject to wide swings and illegal manipulation. The prices shot up on the spot market by 800% in the crisis and left Californians paying for mistakes for more than a decade.