- For the power industry to become increasingly dependent on a fuel with a history of price volatility could be problematic.
- In Texas, where natural gas accounts for more than 50% of electricity production, wholesale power prices recently topped $5,000 per megawatt-hour.
- New York's gas-fired generation has climbed from 29% of electricity supply in 2000 to 44% in 2012.
Should America's new growing dependence on natural gas for electricity production be a cause for concern?
Despite America's abundance of natural gas from shale production, some parts of the country have already had warnings that over-dependence on gas for electricity generation exposes consumers to soaring prices for electricity.
The problem is the declining use of coal and nuclear power, the two sources of electricity that provide the greatest price stability and serve as a hedge against wide fluctuations in gas prices.
For the power industry to become increasingly dependent on a fuel with a history of price volatility could be problematic.
Take PJM, the regional grid operator that covers the mid-Atlantic and parts of the Midwest. When plunging temperatures in the recent cold snap drove up demand for gas, spot prices for electric power in New Jersey, Delaware and large parts of Pennsylvania skyrocketed to $1,500 per megawatt-hour, well above the typical price of $40 or $50.
And in Texas, where natural gas accounts for more than 50% of electricity production, wholesale power prices recently topped $5,000 per megawatt-hour.
Several other major markets are also vulnerable to price spikes.
Today Florida relies on natural gas for 70% of its electricity supply, up from 18% in 2000, and its use of gas is likely to increase further with the shutdown of the Crystal River nuclear plant.
New York's gas-fired generation has climbed from 29% of electricity supply in 2000 to 44% in 2012. Natural gas accounts for more than 50% of power production in New England and 61% in California.
Nationally, since 1995, the United States has built 342,000 megawatts of gas-fired power capacity, approximately 75% of all capacity additions. But coal and nuclear power account for only 6% of the total.
Looking forward, at least 50,000 megawatts of gas capacity is expected to be added by 2020. But less than 10,000 megawatts of new coal and nuclear capacity is expected to be added by 2020, a negligible amount, because approximately 100,000 megawatts of generating capacity — much of it coal — will be retired this decade.
Long-term energy fundamentals support continued reliance on and expansion of nuclear power.
Nuclear plants supply large amounts of carbon-free energy around the clock, safely and reliably. Nuclear plants provide forward price stability and are not subject to the volatility of natural gas prices. And they contribute to the fuel and technology diversity that is the bedrock of a resilient electric sector.
These are among the economic and environmental values of nuclear power, but they are values that the public does not recognize.
There's something seriously wrong with the markets in which nuclear plants are operating — which do not value base-load capacity that's available when needed; which do not provide value for fuel diversity, and which do not recognize the clean air compliance value of a nuclear plant.
We need to ensure a mix of energy sources, so that we are not overly reliant on a single fuel. The Energy Information Administration forecasts a 28% increase in demand for electricity through 2040.
To accommodate that increase, the U.S. would need 339,000 megawatts of new capacity to meet rising demand and to replace generating capacity that is past its prime. That's about 15,000 megawatts annually every year between now and 2040.
Will we just keep ramping up gas-fired capacity while nuclear slips away? Or will policymakers and political leaders address defects in market structure that threaten our nation's energy security?
One option worth considering is for states and regional independent system operators to provide purchasing agreements so that new and existing nuclear-generating capacity has a better market structure. This would encourage long-term investments of the sort needed for nuclear projects.
How so? A nuclear plant is an asset with a 60-year lifetime that is carbon-free and doesn't pollute the air. And, unlike solar and wind power, it is always on.
For the better part of a half-century, America has benefitted from a balanced energy program that has included nuclear power. Today our energy system is the world's best, but that doesn't mean we can let up.
In a nation rightfully concerned about economic and environmental health, natural gas is not the only answer. It is not a substitute for a diverse mix of clean energy sources, since natural gas plants account for 25% of greenhouse-gas emissions from electricity production.
For clean base-load power, we will need nuclear energy. And that's why it's important to craft policies that open up private investment in new nuclear plants.
Perry is a professor of economics at the Flint campus of the University of Michigan and a resident scholar at the American Enterprise Institute.