Editorial: Home Energy and the Fracking Dividend

March 31, 2013

A version of this article appears in the March/April 2013 issue of Home Energy Magazine.

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Most of us will agree that it’s technically feasible to build homes that consume dramatically less energy than today’s typical home. And in most locations we can build a home that draws net zero energy from the utility. But it’s economics that makes us hesitate. Specifically, it’s the value of those energy savings. Can the additional investment be offset by anticipated reductions in energy costs? It’s the same thing for retrofits of existing homes: Do the lower energy bills justify the costs?

Alan Meier (Yasushi Kato)

That’s where fracking enters into the equation. With dramatically lower natural-gas prices, some efficiency measures will take longer to pay for themselves in bill savings. Or at least that’s the claim. We aren’t aware of a downturn in those key indicators of efficiency activity—sales of insulation, efficient windows, condensing furnaces, and the like—but reduced demand could easily be camouflaged by the recent upswing in the housing market. And what about the homes that already use natural gas for combinations of space heating, water heating, cooking, clothes drying, pool heating, and (increasingly) fireplaces? (That’s about half of American homes.) Should they expect a fracking windfall of lower utility bills or increased consumption? I’m going to go out on a limb and guess “Not much.” Why?

First, most of our home energy bill goes to electricity. The average electric bill is about three times higher than the average gas bill. Cheap natural gas is displacing coal in some regions. That coal was already relatively cheap, so instead of getting cheaper energy, we are mostly getting cleaner energy. Also, the price of natural gas doesn’t affect the other costs that determine electricity rates—that is, the costs of building and operating the power plants and transmission lines. Utilities may invest some of the savings they may realize from fracking to update the embarrassingly obsolete—and sometimes dangerous—infrastructure. That might be a good thing.

U.S. Price of Natural Gas Delivered to Residential Consumers

Figure 1. Will cheap gas from fracking spell doom for energy efficiency in the United States? The answer lies in how we define “cheap.”

How will fracking affect the price of natural gas paid by residential customers? That’s not altogether clear. The Energy Information Administration (EIA) data shown in Figure 1 capture the price trends from 1980 into 2012. Prices have fallen in recent years, but only to 2004 levels. (They seemed high then!) Further price reductions are likely, though.

The EIA data also tell us that seasonal fluctuations in residential gas prices can be almost as large as the fracking dividend. It will take attentive consumers to tease out the actual cost reductions amid these fluctuations.

The last reason that fracking will depress natural-gas prices less than some had hoped is that new, large gas customers are lining up. Increased demand by power plants is already taking up some of the surplus. Industry is also retooling to find new uses for the gas, and some companies are moving their energy-intensive operations back to the United States. Remember those expensive facilities we built to import liquefied natural gas from elsewhere? Well, now the oil companies are repurposing the terminals to export American natural gas!

No doubt about it—low energy prices are bad for the energy efficiency business—so there’s some sour grapes here. But that sour taste isn’t likely to be that sour, or to last that long.

Alan Meier is senior executive editor of Home Energy.