Is the era of cheap natural gas over? Some analysts seem to think so, which could have significant implications for property owners, especially this winter. Most commercial facilities still rely on natural gas for their heating systems, and volatile and rising natural gas prices could put a squeeze on property owners depending on how cold this winter turns out to be. The rising prices come at a time when inflationary pressures from clogged-up supply chains are already hurting property owners’ wallets. The U.S. is the largest producer of natural gas globally, meaning we’re better insulated against the price shocks. Nevertheless, higher gas prices could be in store in the coming months, depending on a few factors.
Natural gas is often used in commercial buildings to heat water and interior space and operate cooling equipment. Most facilities’ combined heat and power systems use natural gas, making it the source of 32 percent of total energy end-use consumption in commercial buildings in 2012, according to the most recent figures from the U.S. Energy Information Administration (EIA). Different commercial buildings have different energy needs, but EIA reports that space heating accounted for 25 percent of energy consumption in commercial facilities in 2012. In 2020, commercial buildings accounted for about 10 percent of all natural gas consumption in the U.S.
Energy analysts are concerned natural gas supplies will struggle to meet demand this winter. Natural gas futures reached a seven-year high in early October. Supplies of natural gas are still far below average, and the U.S. is geared up to export a ton of the heat-generating fuel to help ease shortages in Europe and Asia. “There is terrific concern about sufficiency of supply,” John Kilduff, founding partner at Again Capital, told Bloomberg.
So, will you get hit with higher heating bills this winter? It depends, according to Taylor Duncan, Vice President of U.S. Growth and Development at 5, an energy consulting firm. If property owners have fixed-price natural gas contracts in place through this winter and next year, Duncan said this run-up of prices won’t impact their current budgets. Fixed contracts protect property owners from higher prices and price volatility, and Duncan said it’s very common for property owners to have these contracts in place. “However, if a property owner is not under a contract or has any of their gas load floating, they should expect their supply prices to be up around two times what they were last winter and possibly higher depending on the type of winter we have,” she told us.
All this high volatility in natural gas prices could be an argument to electrify heating systems in commercial buildings like boilers and heat pumps. Full-scale electrification of commercial buildings is undoubtedly the green thing to do, as natural gas has become one of the largest sources of greenhouse gas emissions in the United States. But the upfront costs of switching to electric appliances from gas-powered appliances can be high, it’s currently one of the most significant barriers to building electrification. Duncan also said that wholesale and retail electricity prices are seeing similar increases to natural gas right now. Natural gas is an important driver of electricity prices, it’s the fuel used to set the marginal price for electricity.
This certainly doesn’t mean property owners shouldn’t think about building heating system electrification. The timing and economics of electrification will be very specific to each building’s characteristics, but the major benefits are the same for all commercial buildings, including significantly lowering its carbon footprint. As for what to do this winter and in the near future regarding high natural gas prices, it would be wise to think about strategies to reduce gas consumption now.
Cooking with gas
If you think natural gas prices are high in the U.S. right now, just look at Europe, where analysts at Deutsche Bank said prices are up five-fold. European inventory levels are well below average after a long and cold 2020 winter, and as the continent moves away from coal-fired plants, everyone’s competing for natural gas. The increased natural gas prices have been caused by a perfect storm of factors, including increased demand as the pandemic slows and economies reopen and producers who’ve been slow to ramp up output. Asian demand for natural gas has also increased, as China looks to move away from coal, as well.
America produces more natural gas than it consumes, and annual dry natural gas production generally increased from 2005 to 2019, according to EIA. During that time, natural gas prices decreased and have been less volatile since 2010. Until recently, natural gas has been a very domestic commodity for the U.S. and largely insulated from international factors and forces. But over the last decade or so, American natural gas producers have built out liquid natural gas (LNG) export terminals that ship the super-cooled, liquified natural gas to overseas markets where the prices are higher. Duncan said the price difference in domestic natural gas and what LNG can net overseas is generally pretty high, and it usually runs somewhere around a $4 to $8 differential.
Despite being better off than Europe and Asia, many energy analysts, including Duncan, say the era of cheap natural gas and low price volatility may be over. The U.S. just wrapped up a decade of some of the cheapest natural gas most property owners have ever purchased. After the explosion of hydraulic fracturing, the U.S. discovered the abundance of gas we had in shale deposits onshore and the relative ease and low cost of producing it. Duncan said that kept prices historically low and put a decent lid on the volatility. But the golden days of cheap natural gas are fading quickly.
“We’re seeing a new paradigm shift now,” Duncan said. “As more and more of the world moves to decarbonize their fuel sources, such as shutting down coal and oil plants, natural gas is looked to as a lower carbon-emitting transitional fuel. That’s one of the big reasons you’re seeing such a demand for it overseas.”
As the U.S. export capacity for natural gas increases, our domestic prices will likely be more and more affected by international factors. In short, natural gas has become a globalized commodity. For example, Duncan said it “would have been bonkers” just a couple of years ago to think domestic natural gas prices would jump because wind production in the U.K. was down or prices would drop because more Russian natural gas deliveries were ordered to Germany. But that’s precisely what’s happened this fall.
Electrifying building heating systems may not help property owners in the short term, but it’s increasingly becoming a long-term strategy for commercial buildings. U.S. states and cities are more and more enacting policies on natural gas hook-ups on new building construction as the country looks to decarbonize its buildings and reach net-zero emissions goals. More than 50 U.S. cities and counties have enacted measures with restrictions on natural gas in new buildings, including bans in California, New York, Massachusetts, and Washington. Most of these policies target residential homes rather than commercial buildings, but the policies could spark more interest in the market for electric appliances.
In addition to new government policies, switching to electric heating systems is far and above the much more environmentally friendly thing to do than using gas-fired heating systems. Natural gas leakage is higher than initially thought, according to recent research. Leakage comes in the form of methane, a potent greenhouse gas that’s 25 times more potent than carbon dioxide at trapping heat in the atmosphere, according to the EPA.
Heat pumps are the most prominent technology used in building electrification. In an electrified office, furnaces and boilers that run on natural gas, heating oil, or propane can be replaced with ground- or air-source heat pumps that use electricity to send heat where it’s needed or to remove it where it’s not required. Electric heat pumps are also significantly more energy-efficient than gas-fired furnaces, boilers, and water heaters.
Full electrification is usually the more cost-effective option for new buildings, but retrofitting older and existing commercial buildings for electric heat can be a bit more complicated. Property owners can reduce energy consumption and greenhouse gas emissions by switching to electric heat, but for the moment, you’ll likely pay a higher upfront cost to install the equipment. And for now, there aren’t many governmental utility rebates for more efficient electric air-source heat pumps and or heat-pump water heaters.
Winter is here
Electrifying heating systems is a good way to go green, but it may not save you much green (as in cash) immediately, especially this winter. For now, as natural gas prices climb, property owners need practical solutions to lower heating bills. Some ideas are low-hanging fruit, while others would be more complicated investments. For example, clearing air vents and changing filters isn’t super-complicated, but it could contribute to a lower monthly natural gas bill. Air vent contamination has been shown to force heating and cooling systems to work harder to maintain optimal building temperatures. So, cleaning and maintaining air vents could make them work more efficiently, thus lowering energy bills.
Another strategy could be turning off hot-water heaters and recirculation pumps during unoccupied hours. This sounds simple, but a study by the American Council for an Energy-Efficient Economy (ACEEE) found it’s not a common practice in commercial buildings. Property owners can install manually programmable timers or connect pumps and heaters to a building energy management system to control on/off times based on when the building’s occupied. Energy is typically wasted in buildings when boilers are fired up during unoccupied hours, so controlling this via programmable timers can add up to measurable energy savings.
ACEEE did a case study on this practice in a 267,694 square foot facility in California and changed the settings on the recirculation pump to run 13.5 hours per day for five days a week, instead of 24/7. They estimated the total annual energy savings to be 481 kWh in pump electricity savings and 615 therms in natural gas savings. With current energy prices that means that the payback period for installing the manually programmable timer was about three months. ACEEE said that if only 10 percent of U.S. commercial buildings used this strategy, it could lead to combined reduced water heating costs in gas-fired systems of $260 to $550 million annually.
Natural gas still accounts for a large share of energy usage in U.S. commercial buildings and, as gas prices become higher and more volatile, it’s a good time to re-think energy efficiency strategies. In the long run, electrifying building heating systems will be critical to getting commercial buildings to net-zero greenhouse gas emissions and can reduce energy bills, but it may not be a cost-effective strategy for now. About 27 percent of commercial buildings in the U.S. with space heating that relies on fossil fuels can be electrified today with a payback period of fewer than 10 years, according to another recent ACEEE report. Additional government incentives and rebates would make the payback periods more attractive.
As we head into winter, consider securing fixed rates for natural gas to protect against future price volatility. Additional energy-saving strategies like programming water heaters and recirculation pumps to power down during unoccupied hours can also help lower gas bills. The era of cheap natural gas may be over, so coming up with a game plan now for reducing space-heating energy consumption is more important than ever.