Electric Generation Investment in a Time of Natural Gas Price and Carbon Pricing Uncertainty: A Modeling Analysis

Abstract

Low current and forecasted natural gas prices are spurring investment in new gas-fired electric generation in the eastern United States. In both regulated territories and organized electricity markets, natural gas power is beginning to displace significant amounts of retiring coal generation. However, the market price of natural gas has historically been volatile and unpredictable. If gas prices rise substantially from current forecasts in the next two decades, will customers face sharply higher electricity prices? What if a carbon tax accompanies this outcome? This modeling analysis sheds light on these questions by modeling long-term capacity expansion based on current assumptions, and then assessing how economic dispatch in three regions - the Southeast, PJM Interconnection, and ISO New England – will respond to alternate versions of future gas prices and carbon taxes. The results indicate that heavily gas-dependent regions like ISO New England would absorb the imposition of a carbon tax without major electricity price increases, but that it would face substantial price increases with sustained, elevated natural gas prices. The results also suggest that portfolios in the Southeast and PJM will skew more heavily to natural gas generation in the future if investment decisions are made under current conditions and assumptions. If this occurs, these two regions could face sharp electricity price increases with either higher-than-expected natural gas prices or the imposition of a carbon tax.