Higher Gas Prices In Forecast

September 12, 2003
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Many consumers recently received a jolt when they were informed that prices for natural gas would increase this winter. Prices will vary depending on the region of the country and the severity of the winter weather. But one thing remains certain — prices will go up.

According to the U.S. Department of Energy (DOE), “Residential natural gas prices for this heating season are expected to be about 10 to 15 percent higher than the average prices during last winter’s heating season. Much of the price difference is expected to occur in the fourth quarter, when wellhead prices [the cost of the gas itself, excluding transmission and distribution charges] are projected to be about $1.00 per thousand cubic feet (32 percent) higher than one year earlier.”

Secretary of Energy Spencer Abraham indicated that natural gas storage is 32 percent below last year’s level and 22 percent below the previous five-year average, while demand for natural gas has increased over the last decade to levels that might be difficult to sustain under current supply and production constraints.

In Michigan, the Michigan Public Service Commission (MPSC) has already alerted consumers to expect higher bills, stating that residential customers could see an average increase of between $9 and $29 each month.

Addressing the MPSC, Carl English, CEO of the gas division of Consumers Energy, a Michigan gas utility, said, “The natural gas industry is at a critical crossroads. The gas bubble of the 1980s and 1990s disappeared prior to the winter of 2000 and 2001. Supply and demand is now in a precarious balance.”

The Missouri Public Service Commission thought the topic of increased natural gas prices was so important that it has been holding a series of town hall meetings across the state to “help prepare Missouri consumers for the real potential of higher natural gas prices this winter.”

The meetings, unprecedented in the history of public hearings concerning Missouri utilities, were necessitated by the notion that consumers could be lulled into a sense of security because of past mild winters.

“We arranged these meetings to ensure that customers were not caught off guard like they were in the 2001-2002 heating season,” said Kevin Kelly, spokesperson for the Missouri Public Service Commission. “We’ve been sounding the alarm since March of this year about potential higher gas prices this winter.”

The Iowa Utilities Board issued a white paper titled “Natural Gas Price Volatility,” which discusses the effects of demand for energy during the past non-heating season.

The report states, “Less natural gas has been used for electrical generation this summer because of cooler than normal weather in major U.S. natural gas markets. However, early, prolonged cold weather in major gas markets could overcome the higher than anticipated storage levels.”

Natural gas prices vary for residential applications across the United States, according to the U.S. Energy Information Administration. For example, in the past 30 years, from 1972 to 2002, the average cost per 1,000 cubic feet rose from $1.21 to $7.86, but prices varied widely by region. For example, in the past 30 years, costs in Ohio went up from 97 cents to $5.27, while in Montana they rose from $1.05 to $7.52. In Delaware they jumped from $1.71 to $11.05.

Contractors Take Note

Will an increase in natural gas prices affect how HVACR contractors approach their consumer marketing plans this fall? Contractors are aware of the issue of rising utility costs and varying payback rates based on these costs, but their responses were mixed, often reflecting regional differences.

Charlie Elliot, owner of Elliott Heating & Cooling, Sault Ste. Marie, Mich., where winter temperatures often linger below zero, sees reports on rising energy costs as a possible marketing tool.

“The media has made the higher gas prices a relevant topic to discuss now,” he said. “It is another bullet in our marketing gun. Our sales staff is using the rising natural gas prices as a topic to discuss with homeowners. It is something you have to talk about, showing people how they can save money.”

“We always recommend high-efficiency furnaces, no matter what the gas prices are,” said Leo X. Ioannou of Climate Systems Inc., Williston, Vt. “Our gas company also offers rebates for these type of units.

“The cost difference for the equipment, given the code requirements when one uses lower efficiency units, is minimal. Units around 90 percent efficiency are the most logical way to go.”

John Sedine, owner of Engineered Heating & Cooling, Walker, Mich., emphasized that furnace efficiency was just one variable to consider when recommending a heating system.

“We should be offering customers whole-house energy audits to show if there is any energy savings from higher-efficiency equipment,” he urged. “We should be better at doing Manual J calculations and cost comparisons so that when we call on customers we can give them accurate information. We can’t just arbitrarily throw out a number and tell the homeowner that he has to pay X amount of dollars for a furnace that is going to save him five dollars a month on his gas bill.”

Gary Kellermeier, owner of Kellermeier Plumbing & Heating Inc., Haskins, Ohio, has a tested method to support upgrades to higher-efficiency equipment.

“We use an Annual Heating Operating Cost Calculator,” he said. “Based on this tool and Wrightsoft’s J-8 heat loss program, we calculate the estimated operating cost for our customers when looking at replacing a furnace. At today’s gas costs, we can normally pay back the cost to replace an old furnace with a 90 percent-plus variable speed in 3 to 4 years.

“Based on these figures, the replacement of a furnace is the best investment and has the best return over other methods of fuel savings.”

“We do a comparative analysis when we go into a home and it helps us to sell more high-efficiency equipment,” said Elliot. “We are looking at geothermal as an alternate heating source. We are starting to get requests for proposals but the thing is, this type of system is cost-prohibitive for a lot of people.”

Bob Forty, president of Energy Services Air Conditioning & Heating Co., Naperville, Ill., believes in explaining all the options. “We give customers several choices of equipment,” he said. “We first start with the top-of-the-line 94-percent variable-speed furnace, then 93-percent two-stage furnace and 80-percent variable speed furnace. We also go over their estimated annual energy savings in dollars, percent in their annual energy savings, and the estimated annual return on their investment.”

At The End Of The Day…

All of the contractors contacted for this story advocated educating customers and providing them with the information to make the choice that best fits their needs.

“We are trying to uplift our image as contractors and a whole-house audit provides a professional service, as opposed to a contractor who has the attitude of upselling equipment no matter what the reason,” said Sedine.

“We tell our customers that whatever they do, they have the benefit of enjoying the comfort of their new equipment along with the savings until they sell their home,” said Forty.

Many contractors noted that consumer awareness can be the key to getting homeowners talking about energy conservation and high-efficiency products, but many consumers aren’t aware of the impending utility rate increases.

“We are using higher gas costs to market, but it is a difficult task to get the word out,” said Kellermeier. He believes that consumers need to recognize the importance of high-efficiency HVAC equipment.

“We are competing for the consumer’s dollar against the big screen TVs, hot tubs, aluminum siding, etc.,” he said. “We can’t sell chrome wheels or leather seats — things that add glamour to a system, other than a digital thermostat. Yet a digital thermostat represents comfort.”

Selling comfort may require an assist from groups like the Missouri Public Service Commission.

“When we held our town hall meeting in Sikeston, the temperature was 100 degrees,” said Warren Wood, Missouri Public Service Commission Energy department manager. “People were asking us why we were talking about heating and natural gas prices. We said that this is the time for them to get information to prepare themselves for making their homes more energy efficient.

“This is the time to do it — not in the middle of winter.”

Publication date: 09/15/2003

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