Executive Summary
Background

The North American natural gas markets in recent years have been unexpectedly tight, which has led to record prices and volatile market conditions, causing significant harm to gas-intensive industries and families dependent on gas heat. ACEEE responded to this challenge beginning in 2003 with a series of analyses showing that increasing our commitment to energy efficiency would reduce wholesale gas prices and improve our economic health. Our December 2003 report showed that, if policy initiatives to increase investment in energy efficiency and renewable energy were implemented, gas prices would fall by about 20% within five years, saving over $100 billion. Our findings were in-line with the recommendations of the National Petroleum Council's major report on the future of natural gas in the United States and the Secretary of Energy's call for increased focus on energy efficiency. However, no significant policy action has been taken to date.

During the intervening eighteen months, markets have remained tight, though a relatively warm winter in 2003-04 and an unusually cool summer in 2004 avoided the more serious market disruptions that many market watchers feared. Concerns increased in the fall of 2004 as hurricanes disrupted the production of gas in the Gulf of Mexico, global oil prices soared (particularly for heating oil), and forecasts for a colder than normal winter sent natural gas prices to record levels. Since the fall, natural gas prices have declined from their record levels as a result of an unseasonably warm winter and resulting declines in heating oil prices, in spite of continued pressure from high oil prices. In the view of most analysts, natural gas markets remain fundamentally tight, as reflected in rising long-term price forecasts.

Scenarios and Findings

Compared with our 2003 study, this updated analysis reflects a further tightening in natural gas markets. As a result, the price response to changes in natural gas demand from energy efficiency and renewable energy investments is greater than in the previous analysis. With this report, we also extended the analysis period from five years in the 2003 analysis to 15 years. As was seen in the 2003 study, a significant price response is seen in the first five years of the analysis period as a result of current, very tight natural gas markets. In the initial five years, energy efficiency produces most of the benefits. However, as we move into the second five years, the importance of renewable energy increases, with renewables becoming the dominant incremental effect in the final years of the study.

Policy Recommendations and Next Steps

This study demonstrates more clearly than ever the price impacts and other economic benefits impacts that would flow from a rigorous new policy commitment to energy efficiency and renewables. Policy makers at the state and federal level could take a number of concrete actions to realize these benefits. No single policy strategy will achieve the results outlined here. Rather, a portfolio of policies is needed to achieve quick and sustained savings from energy efficiency and renewable energy sources. These policy strategies include:

• Energy efficiency performance targets for utilities
• Expanded federal funding for energy efficiency and renewable energy deployment programs at DOE and EPA, including ENERGY STAR
• Accelerated appliance efficiency standards at both the federal and state levels
• Insuring more efficient new buildings through energy codes
• Better policies for rapid deployment of clean and efficient distributed generation technologies
• Renewable portfolio standards
• Public awareness campaigns by state and national leaders, coordinated with increased funding for implementation programs

Public and private leaders need to "step up to the podium" and issue a call to action for the policies and programs needed to realize the benefits from increased use of energy efficiency and renewable energy. With Congressional action nearing on energy policy, our leaders must act now if we are to blunt the effects of high gas prices in the next few years. The policies recommended in this report are relatively low cost and practical, but they require state our state and federal governments to commit resources.

39 pp., 2005, $20.00, E052