ACEEE'S GRAPEVINE ONLINE

October 6, 2004

TIGHT ENERGY MARKETS MAKE THE CASE FOR EFFICIENCY

Over the last two years, leaders in the energy policy and energy-consuming communities have grown increasingly concerned about rising and volatile natural gas and oil prices. To assess what energy efficiency could do to help stabilize these tight markets, ACEEE undertook an analysis showing that modest gains in natural gas and electric efficiency combined with expanded renewable electricity generation would dramatically reduce natural gas prices (see http://aceee.org/energy/efnatgas-study.htm). While this analysis attracted some attention, federal and state governments have not yet taken significant policy action. Accordingly, in the past year gas prices have stayed high, driven by continued growth in natural gas demand with little in the way of increased supplies. Despite the cool summer (and four Florida hurricanes) that reduced electric-generation demands for gas, leading price forecasts are even higher than a year ago (see Figure 1).

Tight markets, with demand outrunning the markets' ability to meet it, are not limited to natural gas. We have seen similar dynamics in markets for gasoline and heating oil, coal, and electricity. Oil and gas markets have been further unsettled by gulf coast storms that have disrupted production and reduced refinery outputs. As a result, futures prices for heating oil and natural gas are soaring to painful levels, while Federal Reserve and private economists are predicting significant economic impacts, particularly on the consumer spending that has been sustaining the economy.

While few assert that we are running out of energy, many energy market experts are increasingly concerned that we can no longer sustain recent rates of increase in energy demand. Consequently, a consensus is evolving that efficiency-based demand reductions are the only viable near-term way to stabilize energy markets. In remarks at a recent U.S. Combined Heat and Power Association (USCHPA) meeting, Commissioner Larry Soward of the Texas Commission on Environmental Quality (TCEQ) indicated that reducing demand for electricity and natural gas are critical to avoiding economic and environmental catastrophe in his state.

ACEEE will soon publish new analysis showing that energy efficiency and renewable energy can reduce energy prices even more dramatically in these tightening markets (see Figure 2). This new analysis also shows that Midwest states can affect natural gas prices by taking regional action on efficiency. These efficiency investments also contribute to modest increases in economic activity and employment in the region, and help preserve Midwest manufacturing jobs by avoiding the "demand destruction" that high gas prices have caused.

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