THE UNSEEN COSTS OF NATURAL GAS-GENERATED ELECTRICITY

THE UNSEEN COSTS OF NATURAL GAS-GENERATED
ELECTRICITY
Megan E. Hansen, BS, Strata Policy
Randy T Simmons, PhD, Utah State University
Ryan M. Yonk, PhD, Utah State University
The Institute of Political Economy (IPE) at Utah State University seeks to promote a better understanding of the
foundations of a free society by conducting research and disseminating findings through publications, classes,
seminars, conferences, and lectures. By mentoring students and engaging them in research and writing projects, IPE
creates diverse opportunities for students in graduate programs, internships, policy groups, and business.
THE UNSEEN COSTS OF NATURALGAS GENERATED ELECTRICITY
When governments interfere with markets, they often
impose costs on producers, consumers, and taxpayers.
In a recent report on the unseen costs of natural gasgenerated electricity, the Institute of Political Economy
at Utah State University examined different factors
that affect the cost of electricity, including government
policies. This report does not attempt to quantify how
much each factor affects the cost of electricity. Rather,
it identifies and analyzes factors that are often
overlooked. Natural gas-generated electricity has both
explicit and implicit costs. The explicit, or seen costs of
natural gas-fired electricity, include power plant
development and construction, operation and
maintenance, and transmission infrastructure costs.
Often overlooked, however, are the implicit costs of
natural gas-fired electricity, caused by environmental
impacts, government subsidies, mandates, and
regulations that distort the electricity market.
The proportion of the nation’s electricity produced from
natural gas has been increasing since the early 2000s.1
From 2004 to 2014, widespread implementation of
horizontal drilling and hydraulic fracturing increased
electricity production from natural gas by 9.8
percentage points, reaching 27.4 percent of total US
electricity production.2
Despite its growth, natural gas-generated electricity's
social and environmental costs have spurred federal
and state regulations intended to minimize those
impacts. Many policies discourage the use of natural
gas in favor of renewables. But, lawmakers have also
1
Kelly, C. & D. Rosner. 2012, June 15. "Low Natural Gas Prices
Drive Fuel Shifts in the Electric Power Sector." Bipartisan Policy
Center. Retrieved from: http://bipartisanpolicy.org/blog/lownatural-gas-prices-drive-fuel-shifts-electric-power-sector/
2
Since 2004, the share of U.S. rigs that utilize horizontal drilling
has grown from 10% to 62%. See: Preckel, R. & P. Vivian. 2013,
September. “Shifting Market Drivers Keep U.S. Demand Strong
for Tubular Products.” The American Oil and Gas Reporter.
Retrieved from: http://www.aogr.com/magazine/coverstory/shifting-market-drivers-keep-u.s.-demand-strong-for-tubularproducts;
U.S Energy Information Administration (EIA). 2015, June.
enacted contradictory policies that encourage natural
gas production through tax credits and subsidies. Both
policies that encourage and discourage natural gas
production and use distort the energy market.
Policymakers often overlook these unintended
economic consequences. Before making energy policy
decisions, policymakers should consider both the seen,
or face-value costs, as well as the unseen costs
created by government intervention in the energy
market.
EXPLICIT (SEEN) COSTS
A common metric for comparing the cost of electricity
from different technologies and fuels is the levelized
cost of electricity (LCOE). The LCOE is the sum of
estimated lifetime capital costs, operations and
maintenance costs, and transmission investment. The
explicit costs of natural gas are the four main
components of its LCOE. These costs are distributed
over the estimated lifetime of an energy plant and are
measured in terms of dollars per megawatt-hour.3
Capital costs and operations and maintenance costs
are the largest cost components of generating
electricity from natural gas. The third is capacity factor,
a measurement of how much electricity a power plant
generates as a percentage of its maximum output
capacity.4 Finally, the cost of electricity generated from
natural gas is also affected by transmission costs.
Dispatchable sources are energy sources that can be
easily ramped up and down to meet electricity demand,
such as coal and natural gas. Non-dispatchable
sources, such as wind and solar, cannot be used to
meet energy demand because they are dependent on
weather conditions. Using LCOEs to compare the cost
of electricity between fossil fuels and renewables can
“Electricity Net Generation.” Monthly Energy Review. Retrieved
from:
http://www.eia.gov/totalenergy/data/monthly/pdf/sec7_5.pdf
3
U.S. Energy Information Administration. 2015, June 3. “Annual
Energy Outlook 2015: Levelized cost and levelized avoided cost of
new generation resources in the Annual Energy Outlook 2015.”
Retrieved from:
http://www.eia.gov/forecasts/aeo/electricity_generation.cfm
4
The capacity factor used in calculating cost estimates has a
strong effect on how affordable a given energy technology
appears to be.
Read the full report at usu.edu/ipe
be misleading because dispatchable and nondispatchable sources do not function similarly. 5
Because of these complexities, both explicit and
implicit cost factors must be considered when making
energy policy decisions.
IMPLICIT (UNSEEN) COSTS
Though often more difficult to quantify, considering
implicit costs provides a more accurate estimate of the
cost of natural gas-generated electricity. These costs
include less apparent cost factors of natural gas, such
as the costs of complying with state and federal
regulations for natural gas extraction, transportation,
and plant emissions.
THE UNSEEN COSTS OF FEDERAL
ENERGY POLICY
Federal natural gas policies, like regulations and
subsidies, affect the cost of natural gas-generated
electricity by distorting the energy market. Fossil fuels
have historically been the largest beneficiaries of
federal energy incentives. The federal government
spent $837 billion, as measured in 2010 dollars, to
subsidize energy between 1950 and 2010. 6 Of that
sum, natural gas received 14 percent, which is about
$121 billion. The majority of the incentives were
preferential tax policies.7
In fiscal year 2013, natural gas and petroleum liquids
received more than $2.3 billion in subsidies and
support. The vast majority of this support was provided
5
The levelized fixed costs assigned to non-dispatchable
technologies are not 1:1 substitutes for the levelized fixed cost of
dispatchable technologies. Rather, the more non-dispatchable
electricity that is produced, the higher the levelized fixed cost of
the dispatchable sources from which the non-dispatchable
sources derive market share; U.S. Energy Information
Administration. 2015, June 3. “Annual Energy Outlook 2015:
Levelized cost and levelized avoided cost of new generation
resources in the Annual Energy Outlook 2015.” Retrieved from:
http://www.eia.gov/forecasts/aeo/electricity_generation.cfm
6
Management Information Services, Inc. 2011, October.“60 Years
of Energy Incentives; Analysis of Federal Expenditures for Energy
Development.” Pg.1. Retrieved from: http://www.misinet.com/publications/NEI-1011.pdf
7
Management Information Services Inc. (MISI). 2011, October.
"60 Years of Energy Incentives Analysis of Federal Expenditures
for Energy Development". Pg. 1. Retrieved from: http://www.misi-
through the tax code as deductions, exclusions, and
other tax preferences. 8 The Obama Administration
calculates that repealing tax preferences for oil and
natural gas in the 2016 budget proposal would provide
$26.2 billion in additional revenues between 2016 and
2020 and $45.5 billion from 2016 to 2025.9
Some federal programs, such as the loan guarantee
program, create perverse incentives because
developers do not bear the financial burden if their
investments fail. Loan guarantees encourage moral
hazard, in which individuals engage in riskier behavior
than they otherwise would because they know they are
insulated from loss. 10 When investments fail,
taxpayers are liable for losses, not energy developers.
These moral hazards represent an unseen cost of
federal support for the natural gas industry.
SOCIAL AND ENVIRONMENTAL
COSTS
One of the key justifications for government
intervention in the electricity market is to address
social and environmental costs. An accurate estimate
of the cost of producing electricity should include
health and environmental costs imposed on society
that are not borne by producers or consumers, often
known as externalities. Social and environmental costs
include potential health problems, negative effects on
the environment, and contributions to global climate
change.
net.com/publications/NEI-1011.pdf
8
U.S. Energy Information Administration (EIA). 2015, March.
“Direct Federal Financial Interventions and Subsidies in Energy in
Fiscal Year 2013.” Pg. xv-xvi. Retrieved from:
http://www.eia.gov/analysis/requests/subsidy/pdf/subsidy.pdf;
Center on Budget and Policy Priorities. 2015, July 7. Policy Basics:
Tax Exemptions, Deductions, and Credits. Retrieved from:
http://www.cbpp.org/research/policy-basics-tax-exemptionsdeductions-and-credits?fa=view&id=3763
9
Office of Management and Budget. 2015, February. “Fiscal Year
2016 Budget of the U.S. Government.” Pg. 128. Retrieved from:
https://www.whitehouse.gov/sites/default/files/omb/budget/fy2
016/assets/budget.pdf
10
De Rugy, V. 2012, June 19. "Assessing the Department of
Energy Loan Guarantee Program." Retrieved from:
http://mercatus.org/publication/assessing-department-energyloan-guarantee-program
Read the full report at usu.edu/ipe
Natural gas is mostly composed of methane gas, a
hydrocarbon that is more than 20 times more effective
at trapping heat in the atmosphere than carbon
dioxide. 11 Natural gas and petroleum systems
accounted for 29 percent of methane emissions
produced nationwide from 1990 to 2013, making
natural gas the largest source of methane emissions in
the United States. Despite increases in natural gas
production, however, total methane emissions fell
almost 15 percent over that same period. Further,
methane emissions from exploring and producing
natural gas and petroleum products have also
decreased over that same period. 12 In fact, methane
emissions from hydraulically fractured wells have been
reduced by 79 percent since 2005.13
Despite the fact that methane emissions are being
reduced through voluntary means, the EPA recently
released new standards for regulating methane
emissions from well sites and from leaks in pipeline
systems. The EPA estimates that it will cost companies
$170 to $180 million in 2020 and $280 to $330 million
in 2025 to comply with these new standards. Although
the EPA claims the standards will have a positive net
benefit for the climate, these standards will also have
real compliance costs that will likely be passed on to
consumers. 14 Much of the natural gas industry,
however, has already voluntarily implemented
11
U.S. Environmental Protection Agency (EPA). 2015, July 1. “Oil
and Natural Gas Air Pollution Standards.” Retrieved from:
http://www.epa.gov/airquality/oilandgas/basic.html
12
U.S. Environmental Protection Agency (EPA). 2015, November
4. “Overview of Greenhouse Gases.” Retrieved from:
http://www3.epa.gov/climatechange/ghgemissions/gases/ch4.ht
ml
13
Reuters. 2015, August 18. “EPA Proposes Cutting Methane
Emissions from Oil and Natural Gas Drilling.” Retrieved from:
http://www.nbcnews.com/science/environment/epa-proposescutting-methane-emissions-oil-natural-gas-drilling-n411996
14
Reuters. 2015, August 18. “EPA Proposes Cutting Methane
Emissions from Oil and Natural Gas Drilling.” Retrieved from:
http://www.nbcnews.com/science/environment/epa-proposescutting-methane-emissions-oil-natural-gas-drilling-n411996
15
Bunzey, Rachael. 2012, November 26. “Natural Gas and Green
Completion in a Nut Shell.” Energy in Depth. Retrieved from:
http://energyindepth.org/marcellus/natural-gas-and-greencompletion-in-a-nut-shell/
16
Gold, Russell. 2015, April. "The Boom: How Fracking Ignited the
American Energy Revolution and Changed the World." Simon &
Schuster. Pg. 53-54.
17
Wertz, Joe. 2015, April 21. “State Seismologist: Oklahoma
Earthquakes ‘Very Likely’ Triggered by Oil and Gas Disposal
technology to reduce methane emissions, as lost
methane reduces profitability.15
Another major environmental concern with hydraulic
fracturing is the storage and disposal of wastewater.
Disposing of wastewater can be difficult because
municipal and private water treatment facilities are not
always capable of treating wastewater properly.16 For
example, one of the most common methods of water
disposal involves injecting water into disposal wells
deep underground. This practice, however, may
lubricate faults and create tremors. 17 Areas in
Oklahoma have experienced an increase in geological
activity that scientists are attributing, not to hydraulic
fracturing, but to improper wastewater disposal
practices.18
Another environmental concern with hydraulic
fracturing is that the technology could contaminate
drinking water.19 The EPA investigated the effects of
hydraulic fracturing on groundwater and found no
evidence that these mechanisms have led to
widespread or systemic impacts on drinking water
resources in the United States. Further, the EPA
indicated that the number of cases where drinking
water was affected is small relative to the number of
hydraulically fractured wells.20
Wells.” State Impact. Retrieved from:
https://stateimpact.npr.org/oklahoma/2015/04/21/stateseismologist-oklahoma-earthquakes-very-likely-triggered-by-oiland-gas-disposal-wells/
18
Wertz, Joe. 2015, April 21. “State Seismologist: Oklahoma
Earthquakes ‘Very Likely’ Triggered by Oil and Gas Disposal
Wells.” State Impact. Retrieved from:
https://stateimpact.npr.org/oklahoma/2015/04/21/stateseismologist-oklahoma-earthquakes-very-likely-triggered-by-oiland-gas-disposal-wells/; United States Geological Survey (USGS).
2014, January. “Earthquakes in the Stable Continental Region.”
USGS. Retrieved from:
http://earthquake.usgs.gov/earthquakes/eventpage/usc000tca7#g
eneral_summary
19
Fischetti, Mark. 2013 August 20. “Groundwater Contamination
May End the Gas-Fracking Boom”. Scientific American. Retrieved
from: http://www.scientificamerican.com/article/groundwatercontamination-may-end-the-gas-fracking-boom/
20
U.S. Environmental Protection Agency (EPA). 2015, June 4.
“Assessment of the Potential Impacts of Hydraulic Fracturing for
Oil and Gas on Drinking Water Resources (External Review
Draft).” Retrieved from:
http://cfpub.epa.gov/ncea/hfstudy/recordisplay.cfm?deid=244651
Read the full report at usu.edu/ipe
THE CLEAN POWER PLAN
Claiming authority from the Clean Air Act (CAA), in
August 2015 the EPA set carbon pollution reduction
standards for power plants. Known as the Clean Power
Plan (CPP), these standards will require electric utilities
to reduce carbon emissions to 32 percent below the
2005 recorded levels by 2030 on a state-by-state basis.
Like most provisions in the CAA, the CPP sets a
standard for the states and then the states must decide
how best to meet that standard.21
Widely cited cost estimates of the CPP showcase the
radical divergence in the CPP's expected effects, with
estimates ranging from $26 to 45 billion in net benefits,
to $479 billion in net costs. The wide range in findings
of these studies demonstrate the high level of
uncertainty regarding what the effects of the CPP will
actually be.22
Although it focuses mainly on coal, the CPP will have
an impact on the energy sector that reaches much
further than coal power alone. The plan calls for a
switch to natural gas combined cycle (NGCC)
generation, along with renewable energy sources, to
cover the loss of production from closing coal plants.23
By altering the energy market and artificially increasing
the demand for natural gas, the CPP creates unseen
costs that should be considered when determining the
actual cost of natural gas-generated electricity.
21
Environmental Protection Agency. 2015, August 3. “Carbon
Pollution Emission Guidelines for Existing Stationary Sources:
Electric Utility Generating Units”. Pg. 16. Retrieved from:
http://www2.epa.gov/sites/production/files/201508/documents/cpp-final-rule.pdf
22
Institute for 21st Century Energy. 2014. “Assessing the Impact
of Potential New Carbon Regulations in the United States.” Pg. 2.
U.S. Chamber of Commerce. Retrieved from:
http://www.energyxxi.org/sites/default/files/filetool/Assessing_the_Impact_of_Potential_New_Carbon_Regulati
ons_in_the_United_States.pdf; NERA Economic Consulting. 2014,
October. "Potential Energy Impacts of the EPA Proposed Clean
Power Plan." Pg. 21. Retrieved from:
http://www.nera.com/content/dam/nera/publications/2014/NER
A_ACCCE_CPP_Final_10.17.2014.pdf; Environmental Protection
Agency (EPA). 2015, August 6. “FACT SHEET: Overview of the
Clean Power Plan.” Retrieved from:
http://www2.epa.gov/cleanpowerplan/fact-sheet-overview-cleanpower-plan
23
Environmental Protection Agency. (2015, August 3). “Carbon
THE UNSEEN COSTS OF STATE
POLICIES
Federal legislation has removed many federal
regulatory standards for natural gas producers, leaving
the regulation of hydraulic fracturing largely up to the
states. Policymakers in Vermont, Maryland, and New
York have enacted statewide bans on hydraulic
fracturing.24 Outright hydraulic fracturing bans prevent
profitable development of natural resources and
require additional transportation expenses, creating an
unseen cost of natural gas. Texas, on the other hand,
requires natural gas developers to make arrangements
with city officials to drill within city borders, ensuring
local interests are represented without discouraging
natural gas production within the state.25
Natural gas production has economic benefits, but it
also imposes costs on local communities in the forms
of noise pollution and wear and tear on roads. Trucks
used to produce natural gas wear down roadways and
raise costs for road maintenance and repair. For
example, a study published by Carnegie Mellon
University estimated the costs of heavy truck traffic on
Pennsylvania roads caused by shale gas production.
The study found that for 2011 alone, the costs of heavy
truck traffic on all state roads ranged from $13,000 to
$23,000 per well. 26 Policymakers have enacted both
severance taxes and impact fees in an effort to make
up for these unintended consequences of natural gas
Pollution Emission Guidelines for Existing Stationary Sources:
Electric Utility Generating Units.” Retrieved from
http://www.epa.gov/airquality/cpp/cpp-final-rule.pdf
24
Conca, James. 2014, December 27. “New York Fracking Ban
Contrary to State’s Energy Future.” Forbes. Retrieved from:
http://www.forbes.com/sites/jamesconca/2014/12/27/new-yorkfracking-ban-contrary-to-states-energy-future/
25
Davis, Charles. 2012. “The Politics of ‘Fracking’: Regulating
Natural Gas Drilling Practices in Colorado and Texas.” Review of
Policy Research. Pg. 184. Retrieved from:
http://onlinelibrary.wiley.com/doi/10.1111/j.15411338.2011.00547.x/abstract
26
Abramzon, Shmuel, Samaras, Constantine, Curtright, Aimee,
Litovitz, Aviva, & Burger, Nicholas. 2014, March. “Estimating the
Consumptive Use Costs of Shale Natural Gas Extraction on
Pennsylvania Roads.” Carnegie Mellon University. Table 3.
Retrieved from:
http://repository.cmu.edu/cgi/viewcontent.cgi?article=1065&cont
ext=cee
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production, and to recoup part of the cost of natural gas
production borne by local and state infrastructure.
CONCLUSION
Natural gas is one of the least expensive and most
reliable methods of generating electricity today.
Government intervention, however, increases the
unseen costs of generating electricity from natural gas.
If these market-distorting policies were removed,
energy producers and consumers would be able to
make decisions based on the actual cost of electricity
from different sources.
Subsidies, mandates, and regulations burden US
taxpayers and electricity consumers with unwanted
costs, and discourage innovation in energy technology.
If US policymakers were to leave the energy sector to
market forces instead of attempting to anticipate
America's energy needs, taxpayers and electricity
consumers alike would benefit.
Capital Costs
Subsidies
O&M
Regulations
Capacity Factor
Mandates
Transmission Costs
Less Reliable Alternatives
Social and Environmental Costs
Explicit Costs
+
Implicit Costs
=
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The Overall Cost of Coal