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Understanding the Influence of Natural Gas and Capacity Markets on Energy Costs

The energy landscape has undergone significant changes over the past decade, particularly with the rise of natural gas as a preferred fuel source for electricity generation. Stricter air pollution standards, the advent of more efficient natural gas power plants, and advancements in natural gas drilling methods, such as fracking, have all contributed to its prominence.

However, the volatility of natural gas prices, often traded on short-term spot markets, poses a significant risk to electricity costs, which are closely tied to these natural gas prices. With the historic spike to around $13/MMBtu in 2008 and the subsequent drop to record lows, the unpredictable nature of natural gas pricing remains a crucial consideration for businesses nationwide.

Since then, natural gas prices have fallen to new record lows.

pie graph of energy, capacity, losses, etc.

Figure 2: Capacity Costs Have Risen Sharply in Recent Years

Line graph detailing PJM RTO Cleared Capacity Prices

For consumers participating in capacity markets, the impact of these changes is directly observable in their energy bills, which now reflect the higher cost of maintaining a reliable electricity supply.