IHS: Natural Gas Price Advantage Creates Opportunities for Greater Use and Consumer Benefits

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Abundance of relatively low-cost supply creates opportunities to expand benefits of increased natural gas use to new and existing customers

Thursday, January 16, 2014 9:12 am EST

"Greater use of natural gas can help improve overall energy efficiency and reduce energy costs when it is used to displace less efficient and more expensive sources of energy"

(January 16, 2014) – Low natural gas prices resulting from the development of unconventional gas resources in North America will hold for the long term, creating opportunities to expand the economic benefits and cost savings to consumers through greater direct natural gas use, a new IHS report says. Increased use of natural gas also has the potential to contribute to energy efficiency and emissions reduction goals, the report adds.


The report, Fueling the Future with Natural Gas: Bringing It Home, says that the Henry Hub price of natural gas is expected to remain in the range of $4-5 per million British Thermal Units (MMBtu) (in constant 2012 dollars) on an annual average through 2035. About 900 trillion cubic feet (Tcf) of unconventional gas resources – nearly one third of the total recoverable resource base – can be produced economically at a Henry Hub price of $4 per thousand cubic feet (Mcf) or less, the study says. This means that the North American natural gas resource base can accommodate significant increases in demand without requiring a significantly higher price to elicit new supply.


“The newly abundant natural gas resource base presents an opportunity to rethink our approach to natural gas use,” says Tim Gardner, IHS vice president and global head of Power, Gas, Coal and Renewables. “In the past, when natural gas was thought to be a scarce resource, we tried to limit its use. Now that technology has greatly expanded our ability to produce natural gas at relatively low cost, we can look for more ways to capitalize on the economic, efficiency and environmental advantages that natural gas offers.”


The price disparity that has arisen in recent years between natural gas and other energy sources such as electricity and home heating oil is expected to persist, the study says. For the next two decades heating oil prices in the United States are expected to be twice as high as residential natural gas rates (on a national average) and residential electricity rates are expected to remain 3.5 times higher. The sizable price disparities create opportunities to increase natural gas use by replacing existing electric and oil appliances (such as furnaces and water heaters) as well as adding new customers through the expansion of gas distribution systems, the study says.


Measuring the capital and operating costs of space heating, water heating and air conditioning across 11 different U.S. regions, the study finds consumer costs to be significantly lower when natural gas is used for space and water heat. The average savings, on a net present value basis over 15 years, for a gas-heated home relative to an all-electric home across the 11 regions is $5,731, the study says.


In addition to the potential cost benefits, substituting natural gas consumption for other fuels can achieve significant gains in energy efficiency and reductions in greenhouse gas (GHG) emissions, the study says.


According to the study, the “full fuel-cycle” efficiency of natural gas – the actual energy available to the end user as a proportion of the entire consumption of energy involved in producing and delivering that energy – is favorable for applications such as space and water heating and for cooking. Natural gas use also provides the lowest proportion of GHG emissions to energy of any fossil fuel. When used to generate electricity, natural gas emits as much as 50 percent less carbon dioxide than coal. Natural gas use results in negligible emissions of sulfur dioxide, nitrogen oxides, mercury and particulates compared with other fuels, the study says.


The study observes that there have already been positive responses to the new natural gas supply and price outlook in the form of accelerated conversion from heating oil to natural gas. New York City, for example, is currently in the midst of a large-scale conversion from fuel oil use to natural gas use. Gas local distribution companies (LDCs) in Maine are expanding their systems to deliver natural gas into sparsely populated areas serving paper mills and using the industrial demand to provide a base level of support for the infrastructure to connect residential and commercial customers along the way.


The study notes that challenges to greater natural gas use remain, such as the upfront costs for natural gas conversion and existing regulatory frameworks that can discourage economic natural gas projects. Upfront capital and installation costs of natural gas appliances may be higher than those of electric appliances. The natural gas advantage is realized over time as lower fuel costs gradually overcome the higher initial costs. Many potential customers do not have the means to finance a conversion to gas and may be reluctant to do so, especially if their appliances do not need immediate replacement. New policies and regulations may be advisable to assure that high upfront costs do not deter consumers from making prudent fuel choices, the study says.


The study observes that many existing regulatory frameworks were developed in the past when natural gas was considered a scarce resource whose use should be discouraged. As a result, economic tests and criteria required for natural gas expansion often pose obstacles to system expansions that are in fact economic. State governments, public utility commissions and gas LDCs should consider adopting policies that take into account full fuel-cycle energy efficiency and emissions performance and full life-cycle costs.


“Greater use of natural gas can help improve overall energy efficiency and reduce energy costs when it is used to displace less efficient and more expensive sources of energy,” says Mary Barcella, IHS director-North American Natural Gas. “Regulators and policy makers need to consider how best to adapt their state and local regulations to the new realities of natural gas availability and cost.”


Fueling the Future with Natural Gas: Bringing It Home also examines other potential growth markets for natural gas, such as transportation and combined heat and power (CHP).


Natural gas use in transportation – currently in its infancy – represents a high-potential growth area, the study says, particularly in terms of trucks. Oil’s dominance in the on-road vehicle market is more vulnerable to competition from natural gas vehicles (NGVs) than at any other time due to a wide price difference between oil and natural gas that is expected to continue. Retail gasoline and diesel prices are expected to be two times higher for equivalent energy content than residential natural gas prices through 2035.


Natural gas heavy-duty vehicles (HDVs) are currently the main source of natural gas growth in the transportation sector, the study notes. These vehicles are best positioned to overcome challenges such as higher upfront costs and sparse refueling networks. The high mileage that these vehicles travel in many cases allows them to recoup upfront costs through fuel savings in less than three years and the high volume of traffic over the same routes also makes the development of a refueling network more viable.


The report examines the challenges to natural gas-fueled light-duty vehicles (LDVs) including those posed by current consumer habits and public policy, and suggests potential ways to overcome these challenges. However, the growth of the HDV market for natural gas has the potential to pave the way for later growth in natural gas-fueled LDVs, Gardner added.


Natural gas-fueled CHP produces electricity and useable heat from a single source of energy at the site of use, achieving high overall energy efficiency and avoiding losses and costs associated with transmission and distribution from the central power grid. CHP capacity is currently concentrated in the industrial and commercial sector. According to the study, CHP has yet to penetrate small- and medium-scale residential and commercial markets primarily due to high costs. Regulatory and policy changes are likely to be necessary for CHP to grow. The study notes, for instance, that some states include CHP technology in programs for energy efficiency, renewable portfolio programs and power sales.


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About The Study

Fueling the Future with Natural Gas: Bringing It Home examines the potential for future growth in consumer demand for natural gas in the United States. It considers relevant technology, infrastructure, economic and regulatory issues, drawing on proprietary research, forecasts, analyses and data from IHS energy insight, economic, automotive, chemical and other practice areasThe study was supported by the American Gas Foundation. IHS Inc. is exclusively responsible for the analysis, content, and perspectives provided.

Download the Complete Study

To download the complete report, Fueling the Future with Natural Gas: Bringing It Home, visit www.ihs.com/fuelingthefuturewithng

About IHS (www.ihs.com)

IHS (NYSE: IHS) is the leading source of information, insight and analytics in critical areas that shape today’s business landscape. Businesses and governments in more than 165 countries around the globe rely on the comprehensive content, expert independent analysis and flexible delivery methods of IHS to make high-impact decisions and develop strategies with speed and confidence. IHS has been in business since 1959 and became a publicly traded company on the New York Stock Exchange in 2005. Headquartered in Englewood, Colorado, USA, IHS is committed to sustainable, profitable growth and employs approximately 8,000 people in 31 countries around the world.

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