Is the U.S. Too Dependent on Natural Gas for Electricity?

As natural gas prices rise, concerns about electricity price spikes surface.

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A worker steps through a maze of hoses at a remote fracking site run by Halliburton for natural-gas producer Williams in Rulison, Colo. in 2009.

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It used to be that coal was king when it came to generating the electricity needed to keep America's lights on. Cheaper and less volatile than energy sources such as oil, coal plants sprouted up in droves following the Arab oil embargo in 1973, promising consumers inexpensive, reliable energy.

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But heightened sensitivity to environmental challenges, such as carbon emissions and climate change, coupled with the nation's so-called "shale gale" is changing all that, ushering in an era where cheap natural gas generates an increasing amount of the nation's electricity and powers more vehicles.

Just four years ago, natural gas cost about $9 per million British thermal units (BTU) according to government data, much too expensive to compete with coal in generating electricity. But thanks to hydraulic fracturing, developers have been able to tap into massive stores of natural gas trapped in shale formations across the country, driving up supplies and driving down prices. Last year, gas prices fell below $2 per million BTUs, ousting coal as the cheapest fuel to produce electricity, and causing utilities to increasingly rely on natural gas over coal.

According to the Energy Information Administration, natural gas accounted for just 19 percent of the nation's electricity generation in 2005. Now that figure is closer to 30 percent. If projections about the decline in nuclear and coal capacity are correct, some industry watchers say natural gas will generate close to half of the nation's electricity in coming years.

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That might be an encouraging prospect with prices at historic lows, but given industry efforts to soften the slide in prices — including scaled-back gas production and new storage facilities to prevent supply gluts — shale gale or not, rock-bottom costs for natural gas can't last forever. As of Thursday, natural gas futures were at $4.05 per million BTUs, according to Reuters, up from $1.82 around this time last year.

While that's still competitive with coal, rising natural gas prices could ultimately make it more economical for existing power plants to burn more coal. The EIA actually projects coal-generated electricity generation to pick up over the next two years as gas prices trend upward.

Still, over the longer term, new air pollution regulations that are expected to come from the Environmental Protection Agency will make it increasingly uneconomical to build new coal plants, reducing coal capacity by 20 percent according to some estimates and increasing the nation's reliance on natural gas. That's prompted concerns that the United States might be putting all of its eggs in one basket when it comes to the nation's electric grid, especially since natural gas prices have historically been quite volatile and subject to steep spikes.

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"There's a changing balance in [our energy portfolio] with nuclear capacity projected to be cut in half and coal capacity reduced by 20 percent," says Rob Patrylak, a managing director of Black & Veatch. "We're going to be very dependent on natural gas and any price swings are going to be very significant."

Recent debate swirling around exporting natural gas has keyed into the potential for price spikes, with a coalition of manufacturers and industry trade groups lobbying Congress to withhold significant exports. While the current supply picture is encouraging — the EIA projects gas production to increase over the next three years — the combination of proposed exports and increased domestic demand could result in "significant price increases," says Dave Schryver, executive vice president at the American Public Gas Association.

"It's ultimately determined if and how much natural gas is shipped overseas," Schryver adds. "This ongoing trend [of using more natural gas] in electricity [generation] is going to continue and the increased demand is going to have an impact on prices."