Last stop, Pennsylvania! We decided to make the Keystone State our final pit stop on our 6-part blog series journey exploring localized energy profiles across the country.
(To view other posts in this series, click here.)
GIANT OF NATURAL GAS
Prior to 2010, Pennsylvania was a net importer of natural gas supply but since the advent of shale gas production, Pennsylvania has become the second largest natural gas producer in the country, second to only Texas. “The great Pennsylvania natural gas rush is perhaps the most unpredicted significant energy development in the past 100 years,” said Jude Clemente, Energy Market Analyst at Trane Building Advantage, for Forbes.com.
The largest natural gas shale basin in the United States by reserve volume, Marcellus Shale, runs across the Western part of the Keystone State and has created a new ‘mega-industry.’ This has made the state and the country as a whole, a low-cost natural gas production giant. While price pressures began to slow down production in 2016, the Marcellus region remained the most profitable and has continued to see increased production.
A storyline to follow, that could slow Pennsylvania’s production and raise natural gas prices, is the possibility of excise taxes of natural gas production. Currently, the state does not assess any taxes on natural gas extraction, making them the only major production state where this is the case. For example, Texas charges 7.5% of market gas value. There is currently significant bipartisan momentum within the Pennsylvania State Senate to pass a similar tax that would create in excess of $100 million in revenue for the state.
How could this affect your price of natural gas? The new tax would be imposed in addition to the current impact fee structure. “The tax on the drilling industry, under the Senate's plan, would be married to an extension of the state's gross receipts tax - sort of a sales tax on public utilities - to natural gas consumption.” [Pennsylvania Real Time News] Procurement should stay abreast of this possible change as it has been gaining momentum and will impact your monthly bills. The additional monthly fee may appear minimal month over month but during a year’s timeframe it can amount to an over expenditure in what you budgeted for your energy spend.
RETAIL PRICE IMPACT
Pennsylvania’s stark increase in production of natural gas has driven down local, regional, national and even global natural gas and electricity prices. If you have enjoyed a lower utility bill at home or your business, you can thank the Keystone State.
The increase in production levels in Pennsylvania has led to a collapse in basis prices for natural gas. Proper price negation for natural gas supply, behind many of the state’s distribution utilities, can result in negative basis to the NYMEX settlement, meaning the cost of natural gas supply is less than the benchmark national price in Henry Hub. (Henry Hub is a natural gas pipeline located in Louisiana that serves as the official delivery location for future contracts on the NYMEX.)
As discussed throughout this blog series, natural gas pricing and electricity pricing are connected - as natural gas pricing goes, so-to goes electricity pricing. This is due to the abundance of natural gas generation being built out across the country (due to the Marcellus natural gas production) and a couple additional factors:
- Natural gas can be used for peak demand needs
- Natural gas does not need to run as baseload like nuclear or in many cases, coal
Electricity is a more regional commodity than natural gas, so the downward price impacts aren’t quite as dramatic as with natural gas, though they are certainly still material for indirect spend budgeting purposes. Current wholesale electricity prices in Pennsylvania are at or near all-time lows.
The natural gas generation boom in Pennsylvania is directly correlated to the closure of 33 different coal generation stations and over 6,000 MW of generation capacity (around 25% of the state’s current capacity) within the state since 2010. The closure of coal plants has been a common theme identified in several states in our blog series including Ohio, Illinois and Maryland.
Low natural gas pricing and increased cost of compliance made many of the older merchant coal generators in the fleet financially non-viable, even with Pennsylvania being the second largest producer of coal in the country.
Interestingly, with the vast amount of coal and natural gas production within the state, nuclear energy is still the largest generation source, representing 38.6% of net generation in 2016. The state boasts 9 nuclear power reactors at 5 different stations, with a total capacity of 9,720 MW.
As with coal, low natural gas pricing has put some additional financial pressures on nuclear generators within the state, which used to represent the low-cost option. These financial pressures, combined with ongoing security and safety concerns, led to the announcement of the September 2017 closure of the most infamous nuclear generators. Bryan Hanson, Exelon Generation’s Senior Vice President said, "Unit 1 is unprofitable and has lost more than $300 million over the past five years despite being one of Exelon's best-performing plants."
Hanson continued, “The energy market in PJM has not adapted to the evolution of the fleet, which has caused the devaluation of resources." All of Pennsylvania sits within the PJM electric grid, which includes bordering Maryland and Ohio. This wholesale electric distribution system allows Pennsylvania to leverage its vast generating asset to be a net exporter of electricity. The PJM transmission services also impose a fee that is often hidden in the cost of electricity. Hidden fees of this nature can make managing indirect energy spend difficult. Looking at each line item and charge on your current electricity bill can help procurement identify how all fees appear and manage spend appropriately.
UTILITIES WITH RETAIL CHOICE
Pennsylvania provides a competitive supplier energy market by giving the purchaser the ability to choose. This means you do not have to use any specific supplier for your electric or natural gas needs, rather you have the ability to select the provider that best fits your operation’s utility needs. Being aware of your options and selecting the best fitting offering can aid in optimizing your energy spend.
THE FUTURE OF ENERGY
Pennsylvania has made a 2021 commitment to an Alternative Energy Portfolio Standard. Also referred to as ACT 213, the ACT requires 18% of electricity supplied within the state comes from alternative energy sources. Additionally, ACT 213 requires that 8% of electricity supplied within the state comes from solar photovoltaic (PV), solar thermal, wind generation, low-impact hydro, geo-thermal, bio-mass, biologically derived methane-gas, coal-mine methane and fuel cell generation resources. There is a specific requirement that 0.5% of electricity supplied within the state comes from solar PV systems. These are referred to as Tier 1 Sources.
The remaining, 17.5%, can come from Tier II Sources, which includes existing waste coal, distributed generation, demand-side management, large-scale hydro, municipal solid waste, wood pulping and manufacturing byproducts and integrated gasification combined cycle coal generation facilities.
Currently, according to the Public Utility Commission of Pennsylvania, 13% of power generation in Pennsylvania comes from one of the above-defined generation sources. As the commitment to alternative energy grows closer it will likely affect the price of energy across the state. Procurement should be cognizant of any changes in their rates/energy bills.
ELIMINATE ENERGY GUESSWORK
Through our journey across 6 key locations in the United States we have found one commonality that has stretched the full roadmap: every state has unique characteristics driving what you pay for energy. This can make energy a complex area of indirect spend to manage for one location, let alone operations across several states. Procurement can ease the burden by working with a supplier partner that is able to customize a program specific to your needs, eliminating energy guesswork while saving you time and money.
Want to learn more about utility pricing? Watch an on-demand webinar from our partners, the experts at Trane Building Advantage to take a deeper dive into understanding your electricity and natural gas pricing.
OHIO: Understand how to make smarter energy buying decisions in the Buckeye state based on local price drivers.
NEW YORK: Find out how New York’s evolving energy profile affects your cost of energy.
TEXAS: Discover what influences energy pricing in the Lone Star state to appropriately manage your energy spend.
ILLINOIS: Learn how to optimize energy spend management in the home of the Windy City.
MARYLAND: Affect the cost of energy in your Maryland operations based on local energy predictors.