Expect Higher Energy Costs, Even Without New EPA Regs

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My colleague Thomas Kase over at Spend Matters recently penned an analysis of the latest figures published by the US Energy Information Administration (USEIA) including the nation’s electricity generation, capacities, and prices.

Ordinarily, we don’t publish much around monthly energy costs with the exception of diesel prices as they impact steel fuel surcharges.

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The implications of this report should appear noteworthy to manufacturers across the nation. The report and my colleague’s analysis suggest that the nation’s overall electricity generating capacity will continue to decline as well as become less reliable. Moreover, prices will likely increase, particularly if demand exceeds capacity. Add to that the new EPA rules limiting carbon emissions (this will impact coal more so than other energy sources) and it doesn’t take much to easily see US manufacturing operating in a much higher energy cost environment.

And we all know that higher raw material input costs impact sectors such as, say, metal – and in particular, steel and aluminum production.

The following data on all US power sources helps set the context:

  • Total electric power generated in the USA: 1,652 million MWh (megawatt hours)
  • Coal portion of all power generated: 668 million MWh (40.4 percent)
  • Natural gas portion of all power generated: 407 million MWh (24.7 percent)
  • Nuclear portion of all power generated: 317 million MWh (19.2 percent)
  • Wind portion of all power generated: 84 million MWh (5.1 percent)

In addition, the input costs for the two major fossil fuels appear as follows:

  • Coal: $2.39 per million BTU
  • Natural gas: $4.93 per million BTU

Generating Capacity

As my colleague stated, “Of concern in the report is the ongoing reduction in the nation’s overall electrical generating capacity – down from 2,506 million MWh in 2004 to 2,360 MWh in 2013. This is largely because of a 22-percent reduction in coal power generating capacity,” and that trend will continue with the EPA regs.

As Thomas points out, “we are also creating a more nervous grid by loading up on wind and solar – two energy sources that are fickle and prone to fluctuation by the hour if not by the minute. Retiring large amounts of 24/7 steady production coal plants will only reinforce this.”

Perhaps the situation will become less dire if indeed as a nation, our energy demand declines, but it’s hard to see that with a growing population, a rise in the adoption of electric vehicles and growing electronic gadget usage will actually create a net decline.

Even if demand holds steady (which in effect becomes a net decline with a growing population), the EPA regs will take additional capacity offline and cause existing capacity to become more volatile (e.g. more wind/solar). That will result in higher energy prices. It remains unclear how US manufacturers will have the opportunity to enjoy sustainable cost-advantaged electricity generation capability.

For a more detailed analysis of projected new electrical power generation capacity nationwide, check out Thomas’ detailed analysis here.

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