Path Home Shows 2014 Show Archive October 2014 Show 1442 Jason Brown - Price of Electricity

Jason Brown - Price of Electricity

Economist Jason Brown says growing natural gas production is lowering the cost of electricity.
Jason Brown - Price of Electricity

Jason Brown - Price of Electricity

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Show 1442: Jason Brown - Price of Electricity
Air Date: October 19, 2014



Rob McClendon: Well, the U.S. energy boom has wiped out predictions made not so long ago that America’s demand for energy would make us vulnerable to unstable governments halfway across the globe that put simply, just don’t like us very much. Last year, domestic energy production fulfilled nearly 85 percent of U.S. demand, changing the geopolitics that have long been tied to our energy security. But you don’t have to look around the globe to see the impact the growth in domestic energy production has, just open up your electricity bill. Thanks to compressed natural gas, or CNG, electricity rates have fallen in states that use the cleaner burning fuel to power our homes and businesses. Now, earlier, I visited with Jason Brown, an economist with the Federal Reserve Bank in Kansas City, about the cost of electricity in the wake of growing natural gas production.

Rob: So, Jason, if you will, we’ve set the state for us about where we get our electricity and how we generate it.

Jason Brown: Yeah, sure. So most of our electricity are, is generated from three traditional sources. Coal, by far, is the largest source, followed by natural gas and nuclear fuel.

Rob: Uh huh, and we’ve seen a real push to get away from coal, at least here in this part of the country, and move towards natural gas. What could that mean for prices?

Brown: Yeah, so, there’s a couple things that’s happened with the, uh, large increase in the domestic supply of natural gas. It’s creating an abundance of natural gas, and so that’s gonna put downward pressure on the price of natural gas because quite honestly we don’t export very much out of the country. And within the United States, within a domestic market, utilities is the largest end-user of natural gas. And so, with the recession, another thing that happened was, it was also putting downward pressure on crude oil and natural gas prices in general. And you have this large supply come online at about the same time so what utility companies or power generators decided to do, or think about in the face of aging coal-fired plants and in the face of potentially more stringent environmental regulations that would cause the total cost of production from a coal-fired plant increasing, we’ve starting to see a shift in, towards more natural gas. So in the near term what we’ve seen is due to lower natural gas prices. Those states in which more of the electricity’s been generated from natural gas, they’ve actually seen their electricity prices fall.

Rob: Now, I’m assuming these shift towards natural gas isn’t something that can happen quickly just because of both cost and just the technology of making, building a new plant.

Brown: That’s right. That’s exactly right. So obviously there’s capital expenditure in switching, and so most often what we’re probably more like to see is that coal-fired plant would be converted to natural gas-fired plants instead of, you know, like building a brand, a brand new facility.

Rob: So if the natural gas industry is successful in getting people to switch over to natural gas, electricity production, as well as using more natural gas in their vehicles, could the laws of supply and demand, could they come into effect here about prices?

Brown: Absolutely. And so I think that’s one of the concerns that we hear, just from some of our, our business contacts is that some utility companies are a little bit more, are a little bit, uh, concerned about how quickly or their likelihood of switching a lot of their generation to natural gas. The reason is, is because historically natural gas prices have been much more volatile compared to coal and although they’ve been less volatile compared to petroleum products used for electricity generation. And so right now we’re in a low price environment and, uh, you know, general forecasts are that the prices will remain low, although the Energy Information Agency out of the Department of Energy is forecasting 30 percent rise in natural gas prices over the next five years or so. So because of that potential price increase I think some are looking towards converting, but they’re recognizing that they still need that diversified portfolio.

Rob: Yeah.

Brown: You mentioned on the demand side, so as I mentioned, utilities are already the largest end-user. The second largest end-user in the United States are actually for industrial use. So for, think of chemical manufacturing is a good example. And so that, that, there might be, you know, more demand that will come from the domestic market in that way too as domestic manufacturing finds it a comparative advantage and relatively cheaper for natural gas.