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If There's So Much Natural Gas, Why Aren't Electricity Prices Falling?

J. Mijin Cha

One of the main arguments used to justify fracking is that due to the increased supply of natural gas, the price of natural gas is falling and electricity generation is shifting towards using natural gas and away from using coal. Fracking proponents also point to a decline in overall greenhouse gas emissions as a result of natural gas use. But, if natural gas really is so cheap and we are producing more of it, why aren’t electricity prices decreasing? In theory, if there is an overabundance of supply, prices should fall because supply would outweigh demand. Indeed, conservative fracking advocates predict this exact trend in justifying natural gas production. Yet, the price of electricity is not falling. It is, in fact, increasing. So, what gives?

Since 2003, the average retail price of electricity has steadily increased. In 2003, the average price of electricity across all sectors was 7.44 cents per kilowatt-hour. In 2012, the average price was 9.87 cents per kilowatt-hour. Over the same time period, natural gas production also increased. Natural gas consumption is also increasing but not at a pace that would cause demand to be greater than supply. The amount of natural gas reserves has also increased so there shouldn’t be any price increase due to an uncertain supply outlook.

Part of the reason prices haven’t responded to the increased natural gas supply is that utilities often set rates years in advance to protect against fuel price spikes. The cost of delivery is also increasing because utilities are also finally increasing investment in electricity infrastructure, the costs of which are passed on to the customer. Still, the wholesale price of natural gas has significantly decreased. For instance, in the Pennsylvania region, natural gas was $115.30 per MWh on December 5, 2005. On the same date in 2013, the price was $40 per MWh, a 65 percent drop in price. Considering fracking operations really started to take off in 2005, it seems there would be some impact on pricing by now.

As I’ve written before, fracking is no breakthrough. In addition to all the environmental and health harms, it seems there is no real cost benefit to the consumer from all this natural gas production. SO, why are we doing it?