THE UNSEEN COSTS OF NATURAL GAS-GENERATED ELECTRICITY


This research explores both explicit and implicit factors that influence the cost of producing electricity from different sources. The explicit, or seen, costs of electricity include the costs of power plant development and construction, operation & maintenance, and transmission infrastructure. Often overlooked, however, are the implicit, or unseen, costs of electricity caused by government subsidies, mandates, and regulations that distort the electricity market. These unseen costs have real impacts on American consumers and taxpayers.

KEY FINDINGS


Since 2000, natural gas has become one of the largest sources of electricity in the United States. The Institute of Political Economy at Utah State University examined both the explicit and implicit costs of natural gas-generated electricity. The explicit, or seen, costs of electricity production include power plant development and construction, operation & maintenance, and transmission infrastructure costs. The implicit, or unseen, costs of natural gas-generated electricity are often overlooked but affect consumers and taxpayers alike. These unseen costs are caused by environmental impacts, government subsidies, mandates, and regulations that distort the electricity market. Before making energy policy decisions, policymakers should consider both the seen, or face-value costs, as well as the unseen costs created by government intervention in the energy market.

Many policies discourage the use of natural gas in favor of renewables, but lawmakers have also enacted contradictory policies that encourage natural gas production through tax credits and subsidies. Both types of policies distort the energy market. In fiscal year 2013, natural gas and petroleum liquids received $2.346 billion in subsidies and support.

One of the key justifications for government intervention in the electricity market is to address social and environmental costs. Social and environmental costs include potential health problems, negative effects on the environment, and contributions to global climate change. Even these well-intended policies often have unintended consequences and unseen costs.

Many states have regulated hydraulic fracturing in an effort to address environmental concerns, such as wastewater disposal and potential seismic activity. Policymakers in Vermont, Maryland, and New York have enacted statewide bans on hydraulic fracturing. These bans, however, have unseen costs by preventing profitable development of natural resources and requiring additional transportation expenses. Texas, on the other hand, passed legislation prohibiting local governments from banning hydraulic fracturing.


Natural gas production imposes costs on local communities because heavy trucks used to produce natural gas wear down roadways and increase maintenance and repair costs. To recoup some of these costs, states have enacted severance taxes and impact fees on natural gas production.


Government intervention and the social costs of natural gas represent implicit costs of generating electricity from natural gas. If these market-distorting policies were removed, energy producers and consumers would be able to make decisions based on the actual cost of electricity from different sources. Subsidies, mandates, and regulations burden US taxpayers and electricity consumers with unwanted costs. If US policymakers were to leave the energy sector to market forces instead of attempting to anticipate America’s energy needs, taxpayers and electricity consumers alike would benefit.