Executive Summary
The first exploratory Marcellus shale well in Pennsylvania was completed in 2004. By 2007, the very early stages of the U.S. and Pennsylvania unconventional shale-based natural gas revolution were slowly starting to take hold. With a decade of data now available (2007-2016), this report explores how the shale revolution has impacted natural gas pricing to Pennsylvania consumers.
Historically, Pennsylvania gas consumers have paid retail prices higher than national averages.
The “Pennsylvania Gas Discount.” Between 2007 and 2016, gas commodity costs have decreased significantly for all Pennsylvania consumers. Since 2013, Pennsylvania consumers have generally enjoyed a discount in natural gas commodity costs compared to national commodity prices, benchmarked at the Henry Hub.
Pennsylvania Gas Prices Dropping Faster than National Prices. A comparison of inflation-adjusted annual average retail prices from 2007 to 2016 shows that:
- Pennsylvania gas consumers saw significant price decreases with the electric power sector experiencing the most significant reduction of -79%, a value of -$7.32/Mcf. Residential retail gas prices fell by -40%, representing a decrease of -$6.79/Mcf.
- National average prices to all gas consumer sectors also declined. For example, the U.S. electric power sector experienced a -65% reduction, representing a decrease of -$5.47/Mcf, and U.S. residential consumers enjoyed a -34% reduction, valued at -$5.09/Mcf.
As such, it is clear that Pennsylvania consumers enjoyed more significant cost reductions than national averages.
Pennsylvania’s Electric Power Prices Drop Below National Averages. Historically, natural gas prices to Pennsylvania power plants have generally been above U.S. annual average prices. By 2016, annual average delivered electric power prices to Pennsylvania gas generators were $1.04/Mcf lower than the national average.
Citygate and Residential Prices Remain Above National Averages. In 2016, in spite of the Pennsylvania Gas Discount, annual average citygate and residential retail gas prices remain at and above national average prices, respectively. Pennsylvania’s residential prices have been higher than national averages since EIA began collecting these data in 1967.
Industrial and Commercial Gas Costs Drop Significantly. The majority of industrial and commercial gas customers buy gas commodity from third parties (e.g. marketers, producers) rather than from their local gas utility. However, only utility gas pricing was publicly available for these sectors. A proxy (called the PA Hubs Average) for Pennsylvania industrial and commercial gas commodity prices was developed based on an average of PA located gas hub bidweek prices. Between 2010 and 2016, in nominal terms, the annual average PA Hubs Average proxy price dropped 65.8%, while Henry Hub prices dropped by 44%.
The Commodity Prices Gas Utilities Charge Customers Have Plummeted. Since 2007, the commodity rates (called purchased gas cost rates) that PA natural gas distribution companies (NGDC’s) are permitted to charged their customers has decreased by 72% in real terms, from an inflation adjusted annual average of $11.76/Mcf in 2007, down to just $3.28/Mcf in 2016.
It is important to note that PA NGDC’s are required to follow a least-cost natural gas procurement strategy in the competitive wholesale gas markets, then pass along gas costs to retail ratepayers with no profit markup. As a result, gas consumers enjoy the benefits of wholesale gas cost reductions.
The Rates Gas Utilities Charge for Delivery Service Continue to Increase. On a statewide average basis, delivery rates for all customer classes examined (residential, residential heat, and small commercial) have increased. The fastest increase in delivery charges was observed in the residential heating sector, with a compound annual growth rate of 2.67% between 2007 – 2016.
Fewer Service Terminations, Total Debt, and Customers in Debt. Comparing 2007 levels to 2016 on a statewide annual basis, the total number of customers in debt was reduced by almost 79,000 people, total dollars in debt was reduced by nearly $49 million (nominal terms), and customer service terminations (where gas service is shut off due to debt) were reduced by over 4,000 people. The cost of customer assistance programs also dropped by over $72.5 million (nominal terms).
Pennsylvania Increases Gas Demand Far Beyond National Demand Increase. Comparing 2016 to a 2007 baseline, Pennsylvania overall gas demand grew by 50.5%, while U.S. gas demand grew by 18.5%. Demand from the residential sector decreased in Pennsylvania and nationally by 6.8% and 8%, respectively. U.S. average industrial and commercial gas demand grew by 16% and 3.1%, respectively. This was a greater percentage increase compared to the demand increase in Pennsylvania’s industrial sector at 11.4%. Pennsylvania’s commercial sector demand actually declined by 2.1% over that time period.
Electric Power Sector Driving Gas Demand Growth, Especially in Pennsylvania. Gas demand from Pennsylvania’s electric power sector (including from many new gas-fired power plants) increased by almost 250% between 2007 and 2016. During that time period, the electric power sector grew from the state’s smallest to the largest major sector of natural gas demand. U.S. average electric power sector demand grew by 46% during this time, also edging out other U.S. sectors to become the highest volume gas user.
Pennsylvania Production Drives National Supply Increases. Between 2007 and 2016, Pennsylvania’s annual natural gas production levels grew by almost 2,800%. The increase was larger than in any other major gas producing state, and made Pennsylvania the biggest driver of America’s 32% increase in annual natural gas production. In 2007, Pennsylvania produced less than one percent of the nation’s annual gas supply; by 2016 the state contributed over 16% of national annual production.
Pennsylvania Becomes Net Gas Exporter, Consumes Only a Quarter of the Gas it Produces. In 2007, Pennsylvania consumed 4 times more gas than it produced, requiring additional gas to be imported from other states. Since 2011, Pennsylvania has been a net exporter of gas. In 2016, Pennsylvania exported (or stored) 75% of the gas it produced, while still maintaining the PA Gas Discount to the Henry Hub.
Extraordinary Interest in Pipeline Development. Pipeline infrastructure capacity growth has not kept pace with production growth, leading to a local supply glut creating the Pennsylvania Gas Discount to the Henry Hub national price benchmark. Between 2007 and 2016, Pennsylvania saw more project proposals (53 applications) to the Federal Energy Regulatory Commission (FERC) for major interstate gas pipelines than any other state in the nation, almost double the amount of the second highest state (New York, with 27 applications). These 53 projects approved between 2007-2016 represent 12,939 MMcf/d of capacity, and another 7,292 MMcf/d of pipeline capacity impacting Pennsylvania was approved by FERC in the first few months of 2017 (see Appendix A). Not all of these pipeline projects will be built, but many that do become operational will enable increasing amounts of gas to be exported outside of Pennsylvania.
Questions for the Future
The consumer cost benefits of Pennsylvania’s shale revolution are clear and beyond reproach. Yet, there are at least two major unanswered questions going forward.
- How Long with the Pennsylvania Gas Discount Last? Growing pipeline capacity will result in greater market access and rising demand for Pennsylvania’s natural gas. This increase in demand has the potential to slow or reverse falling gas price trends and erode the PA Gas Discount. This could occur as new or expanded pipeline capacity moves Pennsylvania gas outside the state to new areas of demand, increasing Pennsylvania gas commodity prices and decreasing prices to the destination states.
In theory, production increases could offset demand increases and maintain the PA Gas Discount. However, it is unclear if there are practical, technical, or other limits (e.g. rent seeking or profit motive by gas producing firms) to increasing production for the direct purpose of moderating price. In addition, it is unclear how production lags could affect price volatility as demand continues to grow. This is an area ripe for future research, along with exploring the net benefits and costs of gas producer versus gas consumer driven strategies for economic development in Pennsylvania.
Any reduction in the PA Gas Discount will on average result in Pennsylvania’s residential (and citygate) customers paying above national average retail gas prices. Given the connection between gas and power prices, it is also important to understand that erosion of the PA Gas Discount has the potential to also increase electric power prices. - Is Additional Gas Industry Evolution Desirable to Meet Power Sector Needs? Pennsylvania’s participation in PJM Interconnection’s competitive wholesale electricity markets has enabled cheap gas commodity costs to quickly drive down electricity prices and attract investments into new gas-fired power resources, reducing costs to Pennsylvania power consumers.
On the other hand, low power prices threaten the viability of higher-cost, traditional power generators. PJM maintains reliability is not threatened as gas penetration increases on the grid. However, some point to grid resiliency concerns associated with greater reliance on just-in-time gas pipeline fuel delivery. Federal subsidies have been proposed to assist economically struggling generators with on-site fuel stockpiles, at least in part due to real or perceived resiliency concerns.
A decade ago, the power sector demand for gas in Pennsylvania was less than demand from traditional sectors (e.g. industrial, commercial, residential). However, the shale gas revolution has catapulted the electric power sector into the nation and the state’s top consumer of natural gas.
Changes have already been made to better coordinate gas and electricity markets. More research is needed to determine what additional gas industry changes may be beneficial to serve its new top customer, perhaps especially in light of contemporary perceptions about resiliency. Some initial ideas to explore include but are not limited to: greater flexibility in gas contracting, more frequent intra-day gas nominations, innovations in pipeline services, increased gas market and index price transparency, and other potential improvements.
This report was made possible solely by funding from the Kleinman Center for Energy Policy at the University of Pennsylvania. The author would like to thank the numerous stakeholders that contributed their time and perspectives to this effort, as well as the expert and academic reviewers that helped to improve and refine this work.
