High Home Heating Prices: Issues and Solutions

Editor’s Note: It looks like a long, hard winter, and our source is not the Farmer’s Almanac but energy analysts who see sky-high prices for home heating oil, propane and natural gas this winter. In addition to the solutions posted below from the Union of Concerned Scientists (UCS), some homeowners and businesses are taking the increasingly popular (at least in the Northeast) approach of heating with a mix of fuel oil and biodiesel. Production of this agriculturally derived fuel has soared from 18 million gallons in 2002 to 30 million gallons in 2004, according to the National Biodiesel Board.

Some retailers are slipping in a five percent biodiesel mix to their mainstream home heating oil product. They’re also assuring customers that the new fuel won’t cost them a great deal of extra money or damage their boilers. (The jury is still out on burning 100 percent B100 biodiesel.) The Northeast is the focus because it houses 69 percent of all residences burning #2 heating oil. Biodiesel users in the region include Harvard University and the University of Massachusetts at Amherst, the Connecticut and Maine state DOTs, New Hampshire’s Mount Cranmore ski resort and LL Bean.

As temperatures fall this winter, families across the United States can expect to pay significantly more to heat their homes. According to the U.S. Energy Information Administration (EIA), homes that use natural gas for heat can expect to average an additional $306 per typical-sized household, 41 percent more this winter compared with last year. In some regions, the increase could be as high as 70 percent. This coming winter, average heating expenses are nearly 80 percent greater than the previous five-year average, costing homeowners an additional $462 for the season.

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Homeowners that use other fuels should also expect to pay more. For the more than eight million U.S. households—predominantly in the Northeast—that are warmed with heating oil, expenditures are projected to increase by $325 (27 percent) this winter compared with last year, and $659 (76 percent) compared with the past five years. Heat with propane? Expect to pay $230 (21 percent) more this winter. Homes that heat with electricity will be faced with more modest increases of $33, or five percent, largely due to the cost of natural gas for gas-fired power plants.

High natural gas prices are also rippling through the economy, leading to higher costs for manufacturing, chemical processing and agricultural production. This will result in consumers paying more for most of their everyday needs, and a greater risk of job losses in energy-intensive industries.

Fortunately, there are short-term and long-term energy efficiency and renewable energy solutions.

How Did We Get To This Point?

The convergence this year of several factors—rising demand, declining production and two natural disasters—have sent energy prices moving upward.

U.S. demand for natural gas has increased significantly in the last several years. From 1998 to 2003, natural gas-fired power plants have accounted for more than 95 percent of all new electric power capacity built in the U.S. At the same time, natural gas has been the heating fuel of choice for more than 70 percent of new U.S. home constructions. Today, 52 percent of all U.S. homes use natural gas for heating and/or cooling.

As demand for natural gas continues to grow, domestic production levels have struggled to keep pace. Historically, the U.S. has had little trouble meeting our demand with domestic supplies, but in 2000 rising demand ran into shrinking production. Despite record numbers of drilling rigs and wells, domestic production has not increased proportionally.

The issue of high demand and short supplies of natural gas was exacerbated this year when hurricanes Katrina and Rita made direct hits on the Gulf Coast. According to the EIA, these hurricanes combined "damaged, set adrift, or sunk 192 oil and natural gas drilling rigs and producing platforms"—a significant blow to the U.S. petroleum and natural gas industries. Dozens of refineries were shut down due to evacuations leading up to the hurricanes, and many remain offline today due to damage suffered.

As of November 1, natural gas production in the Federal Gulf of Mexico remains at about half of its normal capacity. In addition, natural gas pipelines sustained significant damage and much of the onshore natural gas production in Louisiana remains offline. Complete recovery of energy infrastructure from the hurricane damage is expected to take many months.

Fortunately, there are steps we can take to help ease the pressure of high prices this winter, and there are plenty of clean energy solutions and policies that we can put in place to help reduce the risk of this crisis from happening again. In the near term, we can reduce heating bills by cutting energy waste. Over the longer term, we can reduce our vulnerability to fossil fuel shortages, imports, and price spikes by diversifying our energy supply using renewable energy sources.

What Consumers Can Do Right Now

There are a few simple steps individuals can take immediately, with little or no direct costs, that can often reduce energy costs by 10 to 20 percent or more.
"Install a programmable thermostat to automatically turn down the temperature at night or during the day when nobody is home.
"Weather strip and caulk around windows and doors to prevent heat loss.
"Make sure that radiators, registers and baseboards are clean and not blocked by furniture.
"Close drapes at night to keep heat from escaping.
"Get an annual tune up for the heating system.
"Lower the temperature in the home.

A complete energy audit will often identify major potential savings from investing some money to add insulation, replace windows or install a high efficiency heating system or alternative heating source such as solar or geothermal energy.

Near-Term Policy Solutions

In addition to increasing funding for low-income heating assistance and weatherization programs, state and federal governments can also accelerate appliance efficiency standards; establish energy efficiency performance targets for utilities; strengthen efficiency requirements in energy codes for new buildings; and provide tax breaks and other incentives for homes and businesses to weatherize buildings and purchase energy-efficient appliances and equipment. In addition, the federal government can expand funding for energy efficiency deployment, including the Energy Star program.

Longer-Term Policy Solutions

Over a period of years, we can significantly reduce two of the major causes of this winter’s price increases—the growing demand for natural gas by power plants, and the vulnerability of our energy supply system—by diversifying our energy system with clean, homegrown and more decentralized renewable energy supplies.

Renewable energy resources can begin to protect consumers from high natural gas prices right away. The American Wind Energy Association (AWEA) estimates that installed wind capacity will reach 9,200 megawatts (MW) by the end of this year, enough to reduce as much as half a billion cubic feet of natural gas per day in 2006. This is

the equivalent to approximately four to five percent of the natural gas consumed daily for electric power generation in the United States. AWEA also projects that wind capacity could exceed 14,000 MW by the end of 2007, which would be equivalent to reducing natural gas consumption by as much as .85 billion cubic feet of natural gas per day.

To help reduce the risk of natural gas price volatility in the future, long-term policies supporting renewable energy and energy efficiency should also be deployed. One of the most popular and effective policies to support increased renewable energy deployment is the renewable electricity standard (RES), sometimes known as the renewable portfolio standard. A renewable electricity standard requires electric utilities to gradually increase the amount of renewable energy resources—such as wind, solar and bioenergy—in their supply mix.

Currently, 20 states and the District of Columbia have adopted renewable electricity standards. Combined, state standards will provide support for the development of 29,000 MW of new renewable energy capacity by 2017, which will help to reduce natural gas demand.

Existing state commitments are an excellent start, but a national standard is necessary to diversify the fuel mix for the entire country and insulate our economy from future price spikes and supply shortages while saving consumers money.

A recent analysis by the EIA found that a national standard of 10 percent renewable electricity by 2020 would increase competition in the marketplace, reducing long-term energy costs for homes and businesses by gradually bringing natural gas and electricity prices down. Nationally, the 10 percent standard would save consumers $22.6 billion in lower electricity and natural gas bills by 2025. UCS analysis has found that we could increase our use of renewable electricity to 20 percent by 2020, reducing natural gas demand enough to cut gas prices by nine percent, and save consumers more than $49 billion.

A combination of effective renewable energy and energy efficiency measures would be the fastest and most cost-effective approach to balancing gas demand and supply. UCS’s Clean Energy Blueprint found that a combined efficiency and renewable energy scenario could reduce gas use by 31 percent and natural gas prices by 27 percent compared with business as usual in 2020.

Steve Clemmer is research director for the Union of Concerned Scientists" Clean Energy Program; Jeff Deyette is an energy analyst in the same program.

CONTACT:Energy Information Administration, "Short Term Energy Outlook," November, 2005.

Union of Concerned Scientists