Why Natural Gas Drives Texas Electricity Rates

When the Public Utility Commission of Texas (PUCT) helped set up the rules for Texas electricity deregulation, they noted that ”…the market prices of generation will likely be set by gas-fired generation, and as such, it is appropriate to apply the changes in the market price of natural gas to the entire fuel factor in order to maintain the level of headroom in the price to beat.

This acknowledges that natural gas is used by more than half of power generating plants in Texas. This is followed by coal fired plants, nuclear, and wind. Texas produces 25% of the nation’s natural gas and is the largest producer; it also stores and supplies natural gas via pipeline for all regions of the country. Yet while Texas has large reserves of low grade coal (lignite), most of what is burned in its coal-fired plants is brought in via train from Wyoming and Montana.

Texas produces and consumes more electricity than any other state. However, according to the US Dept. of Energy, “Despite large net interstate electricity imports in some areas, the Texas Interconnect power grid is largely isolated from the integrated power systems serving the eastern and western United States, and most areas of Texas have little ability to export or import electricity to and from other states.”

So, it makes sense for Texas electric power generators to rely more on the supply of natural gas in our backyard rather than waiting for the next 1,000 tons of coal to roll in from Wyoming. Natural gas is also cleaner burning than coal and does not leave behind large amounts of cinder and ash that require proper disposal.

Natural gas is a valuable and relatively rare fuel commodity and is frequently uncovered when drilling for oil. So, its price is bound to a commodity in a very volatile market where prices are often shaped by world events. For this reason, it costs more to buy than coal, nuclear, and wind. Since electricity is not separated in the wires according to how it was generated, the price per kilowatt hour (kWh) is set to the price of the most expensive fuel used to generate it: natural gas. This is known as “the price to beat”.

Critics of the Texas electricity deregulation system have argued that the key to cheaper electricity is to build more coal-fired generation plants. Recent state legislation seeks to clean up Texas’ coal-fired generation. The combination of Texas House Bill 469 and key elements of Texas Senate Bill 2111 establishes a two-tiered incentive package for clean coal projects in Texas.

Coal-fired generation projects capturing at least 50% of their carbon dioxide emissions are eligible for sales tax exemptions for the equipment that captures, transports, and stores their carbon dioxide. It also gives local taxing authorities the option to defer taxes in the early years of a project’s development. The first three projects that can achieve a 70% carbon capture rate will qualify for an additional bonus – a $100 million per project franchise tax credit. Of course, these conditions require generators to meet stringent air emission standards for nitrogen oxides, sulfur dioxide, particulate matter, and mercury.

However, over the past year, the price of natural gas delivered to electric generators has fallen dramatically. In fact, some US Department of Energy (DOE) analysts believe current natural gas prices now add an incentive for electricity generation companies to retire their coal-fired systems with newer natural-gas-fired generation. This is especially true due to the advent of combined cycle natural-gas-fired electricity generators.

Combined cycle generators use a gas turbine (similar to a jet engine) to spin and generate electricity. The waste heat from the turbine is used to heat water and create steam. The steam is then used to spin a steam turbine, thus generating even more electricity. These systems function more efficiently than typical coal-fired units, consuming fewer BTU of fuel per kWh of electricity generated.

Back in July, 2008, gasoline spiked to over $4.00 per gallon. Natural gas prices spiked as well and so did electricity. Consumers cut back on their travel and have continued to do so since. This helped drive down the price of oil, gasoline, and natural gas. In some parts of the country facing tough times, businesses have laid off workers or shut down and are no longer using natural gas to heat their buildings or need electricity to power their machinery.

Now, there is a huge surplus of natural gas. The DOE’s EIA also reported in its weekly natural gas storage report that:

“Working gas in storage was 3,204 Billion cubic feet (Bcf) as of Friday, August 14, 2009, according to EIA estimates Stocks were 562 Bcf higher than last year at this time and 513 Bcf above the 5-year average of 2,691 Bcf.”

That’s an awful lot of natural gas. And what most consumers will want to know, a high supply means natural gas prices and Texas electricity rates—will be low.

In fact, since January 2009, Bounce Energy has cut its prices 7 times.

And possibly, because of this ballooning 5 year storage level high, prices may continue declining through fall.

Tagged as: DRIVES, Electricity, Natural, Rates*, Texas