This paper was approved at the January 2012 Council Meeting in Portland.
Background
Is it better to use natural gas directly in water heaters and furnaces or to generate electricity for electrical space and water heating systems that provide these services? The Council has deliberated on this question since its inception. Over the years, the Council has performed several studies and issued papers addressing the issue. The topic has gone under different names; total-energy efficiency, fuel switching, direct use of gas, and others.
The natural gas companies brought suit against the Council after the First Power Plan, one among the few law suits the Council has faced. The concern was that by providing incentives for improved electricity efficiency the Council would disadvantage natural gas companies and encourage more use of electricity. Over time the concerns have morphed into arguments that direct use of natural gas is more efficient and more benign for the environment.
In 1994, the Council analyzed the economic efficiency of converting existing residential electric space and water heating systems to gas systems. That study showed there were many cost-effective fuel-switching opportunities within the Region, representing a potential savings of over 730 average megawatts. However, the Council has not included programs in its power plans to encourage the direct use of natural gas. The Council has not promoted conversion of electric space and water heat equipment to natural gas equipment.
The Council’s prior analysis indicated that intervention was not necessary because fuel choice markets were working well. That is, regional customers appeared to be making appropriate choices and conversions without intervention. We do not have more recent data on fuel conversion activity, but data on overall fuel shares gives some indication of consumers’ choices over longer periods of time for both new construction and conversions. Consider, for example, the substantial electricity price increases in the early 1980s. The electric space heating share stopped growing in the region while the natural gas space heat share in existing homes increased from 26 to 37 percent. Although data is limited, fuel conversion of existing houses to natural gas has been an active market as well, often promoted by dual fuel utilities.
The Council’s findings and policy on this issue have been very consistent. Analysis has found that direct use of natural gas is often more thermodynamically efficient than using electricity generated from natural gas. However, economic efficiency is the Council’s primary measure of merit. Economic efficiency depends on the specific situation regarding natural gas and electricity prices, home size and energy use, cost of heating equipment and ductwork, and other factors. The Council has found that fuel switching is not conservation under the Northwest Power Act, which defines conservation as the "more efficient use of electricity". Further, the Council also has determined that fuel choice markets are reasonably competitive and that those markets should be allowed to work without interference.
Thus, the current Council policy, which has been reaffirmed several times, is:
The Council recognizes that there are applications in which it is more energy efficient to use natural gas directly than to generate electricity from natural gas and then use the electricity in the end-use application. The Council also recognizes that in many cases the direct use of natural gas can be more economically efficient. These potentially cost-effective reductions in electricity use, while not defined as conservation in the sense the Council uses the term, are nevertheless alternatives to be considered in planning for future electricity requirements.
The changing nature of energy markets, the substantial benefits that can accrue from healthy competition among natural gas, electricity and other fuels, and the desire to preserve individual energy source choices all support the Council taking a market-oriented approach to encouraging efficient fuel decisions in the region.
In light of changing technologies and energy prices and of growing climate concerns, in 2008 the Council was again asked to look at the direct use of natural gas issue. The analysis is called for in the Action Plan (ANLYS-16) of the Sixth Power Plan. This paper describes the analysis and findings and provides recommendations regarding the Council’s existing policies.
