APPENDIX 7­B. IMPACTS OF STANDARDS ON NATURAL GAS PRICES

TABLE OF CONTENTS

**7­B.1 INTRODUCTION** 

**............................................................................................................... 1** 

**7­B.2 NATIONAL**  **ENERGY SAVINGS**  **AND NATIONAL**  **NET PRESENT**  **VALUE**

**RESULTS CALCULATED**  **FROM THE**  **MARKET BASELINE** 

**......................... 1** 

**7­B.3 COMPONENTS**  **OF THE**  **BENEFIT**

**.................................................................................. 3** 

**REFERENCES**

**............................................................................................................................... .**  **4**

LIST OF FIGURES

**Figure 7­B.**  **1 Change**  **in Natural**  **Gas Usage**  **and Price**  **Due to**  **Condensing Standards**  **for**

**Small, Gas­Fired,**  **Hot water**  **Boiler**

**...................................................................... 2** 

**7­A­i**7­B.1 INTRODUCTION

**The NIA**  **described in**  **Chapter 7**  **identifies examines**  **the potential**  **impacts of**  **new**

**standards on**  **the nation**  **using EIA**  **projections for**  **future natural**  **gas and**  **oil prices.**  **For the** 

**analysis of**  **the final**  **rule for**  **commercial boilers,**  **DOE undertook**  **a review**  **of the**  **potential impact** 

**of commercial**  **packaged boiler**  **energy efficiency**  **standards on**  **natural gas**  **prices.**

7­B.2 NATIONAL ENERGY SAVINGS AND NATIONAL NET PRESENT VALUE

RESULTS CALCULATED FROM THE MARKET BASELINE

**A review**  **of the**  **economic literature**  **indicates that**  **there is**  **support for**  **the idea**  **that an** 

**impact on**  **natural gas**  **prices will**  **occur with**  **a reduction**  **in overall**  **natural gas**  **energy**

**consumption and**  **that the**  **price impact**  **would result**  **in a**  **reduction in**  **overall natural**  **gas prices.** 

**DOE examined**  **two earlier**  **analyses of**  **the effect**  **that a**  **reduction in**  **natural gas**  **usage due**  **to**

**efficiency standards**  **would have**  **on natural**  **gas prices.**  **These were**  **analyses and**  **results published** 

**in the**  **2007 Furnace**  **and Boiler**  **final rule**  **(72 FR**  **65136, 65152­54**  **(Nov. 19,**  **2007)) 1**  **and in** 

**analysis prepared**  **for the**  **preliminary TSD**  **for standards**  **for residential**  **water heaters**  **for 2009**  **a**

**. The**  **natural gas**  **price analysis**  **for the**  **furnaces and**  **boilers rulemaking**  **was conducted**  **using a** 

**version of**  **the 2007**  **NEMS­BT that**  **was modified**  **to account**  **for energy**  **savings associated**  **with**

**possible standards**  **for residential**  **gas furnaces,**  **and for**  **the residential**  **water heaters**  **standards**

**rulemaking that**  **used the**  **2008 NEMS­BT.** 

**The preliminary**  **analyses in**  **both studies**  **above estimated**  **that gas**  **demand reductions** 

**resulting from**  **more stringent**  **minimum energy**  **conservation standards**  **would reduce**  **the U.S.** 

**average wellhead**  **natural gas**  **price. An**  **inverse elasticity**  **was calculated**  **in both**  **studies, relating**  **a**

**percentage reduction**  **in the**  **average wellhead**  **natural gas**  **price to**  **a percentage**  **reduction in**  **total**

**annual natural**  **gas consumption.**  **In the**  **furnace and**  **boiler rule,**  **DOE estimated**  **that this**  **inverse**

**elasticity was**  **approximately 0.9.**  **In the**  **residential water**  **heater preliminary**  **analysis, DOE** 

**estimated an**  **inverse elasticity**  **of approximately**  **0.8. An**  **elasticity of**  **0.9 means**  **that for**  **a 1** 

**percent change**  **in energy**  **consumption, the**  **nation experiences**  **a 0.9%**  **reduction in**  **fuel price.** 

**Given the**  **closeness of**  **these inverse**  **elasticity figures**  **for furnaces**  **and water**  **heaters, and**  **given**

**the expected**  **similarity in**  **energy end­use**  **profile expected**  **for space**  **heating equipment,**  **DOE**

**chose to**  **estimate the**  **impact for**  **commercial packaged**  **boilers based**  **on the**  **elasticity estimated** 

**for residential**  **furnaces, or**  **0.9 percent.** 

**DOE then**  **proceeded to**  **estimate the**  **likely maximum**  **impact on**  **fuel prices**  **resulting from** 

**new boiler**  **standard. DOE’s**  **analysis was**  **based on**  **the impact**  **calculated from**  **adopting the** 

**highest efficiency**  **level analyzed**  **for the**  **class of**  **small gas­fired**  **hot water**  **boilers.**

**a Data**  **and preliminary**  **results from**  **analysis of**  **residential water**  **heaters provided**  **by LBNL**  **in June,**  **2009 indicated** 

**an inverse**  **price elasticity**  **of between**  **0.79 and**  **0.81 for**  **natural gas**  **water heaters.**  **Exchange of**  **Email between** 

**David Winiarski,**  **PNNL and**  **Alex Lekov,**  **LBNL, June**  **2009.**

**7­A­1 The**  **condensing efficiency**  **level for**  **small gas­fired**  **hot water**  **boilers showed**  **an estimated** 

**savings of**  **0.223 quads**  **over the**  **period from**  **2012­2042. DOE**  **estimated the**  **impact that**  **the**

**stream of**  **energy savings**  **would have**  **on natural**  **gas prices**  **over the**  **same period.**  **It did**  **this by** 

**calculating in**  **each year**  **in the**  **analysis period**  **the percentage**  **reduction in**  **overall natural**  **gas**

**energy use**  **for the**  **nation. This**  **was done**  **by dividing**  **the quad**  **savings projected**  **from small**  **gas**

**fired hot**  **water boilers**  **at the**  **condensing efficiency**  **level from**  **the NES**  **analysis by**  **the total**  **U.S.**

**natural gas**  **consumption from**  **NEMS­BT for**  **that year.**  **DOE used**  **the EIA**  **2009 April**  **2009**

**reference case**  **forecast 2**  **as providing**  **the base**  **national consumption.**  **The result**  **is a**  **fractional**

**change (reduction)**  **in natural**  **gas fuel**  **use for**  **each year,**  **varying from**  **­0.00011% in**  **2012 to** 

**­**

**0.064% in**  **2042. (See**  **Figure 7­B.1)** 

**DOE then**  **applied the**  **inverse elasticity**  **by multiplying**  **the 0.9**  **value by**  **the fractional** 

**change in**  **fuel consumption**  **calculated in**  **each year**  **and then**  **by the**  **well head**  **natural gas**  **price at** 

**the well**  **head, as**  **predicted by**  **EIA. For**  **well head**  **prices between**  **2031 and**  **2042, DOE**  **used the** 

**average escalation**  **rate for**  **the 10**  **year period**  **from 2021**  **to 2030**  **to escalate**  **the 2030**  **price and** 

**develop estimates**  **for wellhead**  **prices in**  **2031­2042.**

0.000 0.002

$0.000 $0.001

Natural Gas Use Reduction

Well Head Price

2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042ReductioninWellheadPrice($/MBTU)

­0.002

­0.004

­0.006

­0.008

­0.010

­0.012 ­$0.001

­$0.002

­$0.003

­$0.004

­$0.005QUADS

­0.014

­$0.006

­0.016

­0.018 ­$0.007

Figure 7­B. 1 Change in Natural Gas Usage and Price Due to Condensing Standards for Small, Gas­Fired,

Hot water Boiler

**For the**  **2012­2042 time**  **period, DOE**  **estimated that**  **the average**  **price changes**  **amounted**

**to a**  **decrease in**  **the wellhead**  **price for**  **natural gas**  **of 0.25**  **cents per**  **million Btu.**  **Analysis done** 

**for the**  **furnace and**  **boiler rule**  **showed that**  **while changes**  **in price**  **were could**  **be positive**  **and**

**negative depending**  **on use**  **sector, the**  **effect on**  **the wellhead**  **price for**  **natural gas**  **was a**  **decrease.**

**7­A­2 In**  **previous studies,**  **the projected**  **change in**  **the natural**  **gas price**  **varies among**  **the end** 

**use sectors.**  **For example,**  **in the**  **analysis for**  **residential furnaces,**  **DOE estimated**  **that natural**  **gas**

**prices would**  **decrease for**  **the industrial**  **and electric**  **power sectors,**  **and increase**  **for residential** 

**consumers. The**  **increase in**  **the residential**  **price is**  **believed to**  **occur because**  **the fixed**  **charges**

**(e.g., transmission**  **infrastructure costs)**  **are spread**  **over fewer**  **million Btu**  **of gas**  **sales in**  **the**

**standards case,**  **thus placing**  **upward pressure**  **on the**  **average price**  **per million**  **Btu. A**  **similar**

**pattern could**  **be expected**  **to occur**  **in the**  **commercial sector**  **with commercial**  **boilers.**

**Although the**  **estimated reduction**  **in average**  **natural gas**  **prices is**  **small, the**  **estimated**

**economy­wide savings**  **in natural**  **gas expenditures**  **over the**  **2012­2042 forecast**  **period have**  **an**

**estimated net**  **present value**  **of $0.29**  **billion at**  **a seven­percent**  **discount rate.** 

7­B.3 COMPONENTS OF THE BENEFIT

**A decline**  **in natural**  **gas consumption**  **may lower**  **natural gas**  **prices for**  **two primary** 

**reasons. A**  **decrease in**  **consumption would**  **lower the**  **output of**  **existing natural**  **gas production** 

**capacity, leading**  **to increased**  **competition and**  **downward pressure**  **on prices.**  **A second**  **reason is** 

**that reduced**  **consumption slows**  **the depletion**  **of low­cost**  **gas reserves**  **which lowers**  **the future** 

**cost of**  **finding and**  **extracting natural**  **gas resources.** 

**When gas**  **prices drop**  **in response**  **to a**  **lower output**  **of existing**  **natural gas**  **production**

**capacity, consumers**  **benefit, but**  **producers suffer.**  **In economic**  **terms, the**  **situation represents**  **a**

**benefits transfer**  **to consumers**  **(whose expenditures**  **fall) from**  **producers (whose**  **revenue falls** 

**equally). When**  **prices decrease**  **because extraction**  **costs decline,**  **however, consumers**  **and**

**producers both**  **benefit, and**  **the change**  **in natural**  **gas prices**  **represents a**  **net gain**  **to society.** 

**Consumers benefit**  **from the**  **lower prices,**  **and producers,**  **whose revenues**  **and costs**  **both fall,**  **are**

**made no**  **worse off.** 

**The short­term**  **impact of**  **lower consumption**  **on natural**  **gas price**  **likely results**  **from**

**changes in**  **the utilization**  **of natural**  **gas production**  **and capacity.**  **In the**  **short run,**  **DOE expects** 

**that consumer**  **savings from**  **lower natural**  **gas prices**  **would be**  **offset by**  **declines in**  **gas producer** 

**revenue. In**  **the long**  **run, however,**  **previous analyses**  **for residential**  **furnaces indicated**  **that the** 

**reduction in**  **natural gas**  **prices mainly**  **results from**  **changes in**  **gas extraction**  **costs. Since**  **there is** 

**only a**  **limited supply**  **of low­cost,**  **conventional natural**  **gas sources,**  **natural gas**  **extraction costs** 

**rise over**  **time as**  **these low­cost**  **sources are**  **depleted. Reduced**  **gas demand**  **puts downward** 

**pressure on**  **extraction costs**  **and prices**  **by delaying**  **the depletion**  **of the**  **low­cost reserves**  **and the** 

**shift toward**  **higher­cost sources.**  **However, as**  **changes in**  **extraction costs**  **are projected**  **to occur** 

**in later**  **years, the**  **uncertainty of**  **the actual**  **savings that**  **would be**  **realized is**  **increased.**

**Based on**  **the discussed**  **analysis, DOE**  **recognizes that**  **there is**  **uncertainty about**  **the**

**magnitude, distribution,**  **and timing**  **of the**  **costs, benefits,**  **and net**  **benefits within**  **the economy.** 

**DOE’s previous**  **analyses indicated**  **that the**  **prices of**  **natural gas**  **to the**  **end use**  **consumers**

**(residential) would**  **increase slightly,**  **due to**  **fixed costs**  **in the**  **distribution of**  **natural gas**  **to the** 

**consumer becoming**  **a higher**  **fraction of**  **the total**  **cost. A**  **similar effect**  **is possible**  **in the** 

**7­A­3 commercial**  **sector with**  **commercial boilers.**  **While DOE**  **has not**  **been able**  **to estimate**  **these**

**potential effects,**  **DOE anticipates**  **the effect**  **will be**  **small since**  **the magnitude**  **of the**  **gas price** 

**change is**  **small (but**  **likely to**  **vary as**  **the natural**  **gas savings**  **increases).**

**Similarly, DOE**  **is uncertain**  **of the**  **effects of**  **the drop**  **in natural**  **gas on**  **producers and** 

**distributors of**  **natural gas.**  **While their**  **revenues and**  **costs are**  **expected to**  **drop, it**  **is uncertain** 

**whether they**  **will drop**  **in proportion**  **over time.**  **The supply**  **side will**  **likely experience**  **revenue**

**loss due**  **to both**  **the price**  **changes and**  **the reduction**  **in gas**  **sales that**  **they will**  **experience.**

REFERENCES

**1** DOE, 2007. Technical Support Document for Residential Furnaces and Boilers. **U.S.**

**Department of**  **Energy. Available**  **at**

**< http://www1.eere.energy.gov/buildings/appliance_standards/residential/furnace_boiler_fr.ht** 

**ml>. Last**  **accessed June**  **2009**

**2 American**  **Society of**  **Heating, Refrigerating,**  **and Air­Conditioning**  **Engineers (ASHRAE).** 

**2008.** Energy Standard for Buildings Except Low­Rise Residential Buildings

**. ANSI/ASHRAE**  **90.1­2007, ASHRAE,**  **Atlanta, Georgia.** 

**7­A­4**