Expect High Home Heating Costs This Winter
by Paul Cutting, Energy Planner
Get ready, it may cost a lot more to heat your home this winter. The convergence of a multitude of factors, including the war in Ukraine, a summer of unprecedented heat and electricity demand, diminished seasonal natural gas reserves, record exports of liquified natural gas, impending price caps on Russian energy, and continued fallout from the February 2021 Texas energy meltdown are all aligning to create a winter of potential pain for Iowans. Let’s walk through these factors one at a time.
The Polar Vortex and the Texas Meltdown
In March, our former WED colleague, Joel, wrote an excellent explainer of why home heating costs were significantly greater than the winter before. Increased wholesale gas prices, coupled with the fallout of the February 2021 polar vortex, led to winter 2021-2022 consumer gas bills nearly twice as high as the previous winter.
As Joel outlined, fluctuations in wholesale natural gas are eventually passed on to end-use consumers. If the cost of acquiring gas increases for Black Hills Energy, its customers pay for that increase in the form of higher per-therm energy costs. During the roughly week-long polar vortex in February 2021, wholesale gas prices spiked on the order of 50-100 times their normal levels. During that one week period, Black Hills spent $95,450,000 on wholesale gas, roughly equal to what it would spend during an entire normal year.
To pay for this price shock, Black Hills and the Iowa Utility Board agreed to a fee of $.34/therm to be spread amongst all Iowa customers for 24 months, ending beginning April 2023. According to Black Hill’s filing with the Iowa Utilities Board, this equates to roughly $450 per customer.
Heading into another cold season, this per-therm polar vortex fee, coupled with all the other factors affecting global commodity prices—which we’ll talk about next—will likely result in a winter of high energy costs.
The War in Ukraine, a Wobbly Europe and a Summer of Unprecedented Heat
Before the war in Ukraine began in February, natural gas prices were on the rise globally, due in large part to increased demand coming out of the pandemic. In Europe specifically, its reliance on Russian gas, coupled with untimely drawdowns of nuclear and coal electric generation, compounded the problem. Look no further than Germany, where the phase-out of three of its last six remaining nuclear reactors occurred in 2021. Coupled with the fact that Germany has historically been an electric net-exporter to the rest of the continent, the reverberations of German reactor retirement on regional gas prices has proven to be especially acute.
Meanwhile, in France, the nation’s nuclear fleet, which historically has provided about 75% of its electric consumption, has been severely disrupted this summer as Europe’s worst drought in at least 500 years has caused rivers to dry up, resulting in reduced nuclear output as plants are unable to utilize rivers for cooling water. As of August 29, 57% of France’s nuclear capacity was offline. The situation with hydroelectric power throughout the continent is equally as dire, and in France, year over year output is down 25%. To make up for production shortfalls, France has been relying on German electricity imports, of which a greater share is being produced by natural gas and coal. Given all this, European wholesale electric rates are on average five times higher than they were a year ago.
Unlike petroleum prices which are a truly globalized commodity, markets for natural gas have historically been regional; the price of gas paid by consumers in Europe is different from the price paid in North America. That remains mostly true today, but to a somewhat lesser degree, as liquifying natural gas (LNG) has allowed for substantial movement of production between markets and regions.
As the fallout from the war in Ukraine came into full view, European markets for natural gas exploded. Prices on the Title Transfer Facility (TTF), Europe’s main gas benchmark, increased three fold in March, and have remained elevated at roughly 250% above pre-war levels. As if last winter’s pain wasn’t enough, many Europeans are making plans to forfeit normal home heating, stashing firewood at unprecedented levels resulting in illegal harvesting and theft, and burning garbage and coal for home heating.
As the war in Ukraine progressed, Russian gas supplies to Europe became irregular and unpredictable, with supplies through Nord Stream 1 stopping and starting due to claims by Russia of planned and unplanned maintenance, with the eventual ceasing of flow in early September. To make up for shortfalls, Europe has had to look elsewhere for gas, including the UAE and the United States, where gas imports to Europe tripled during the first four months of 2022.
In an attempt to cut off Russia’s ability to fund its war in Ukraine, European Union member states in late May agreed to a plan to fully cut off Russian oil imports by the end of 2022. Partially a consequence of investor anticipation of the proposed ban, increased global energy demand as the economy recovered from the pandemic, a lack of slack in the global oil supply, and a limit in refining capacity, prices increased dramatically during the early summer months, but have since come down. As we all witnessed, prices for gasoline topped out at around $5.00 per gallon locally. Prices for liquid propane (LP), of which our rural neighbors are greatly dependent on, are also significantly elevated.
The situation in the United States appears to be better relative to Europe, but that’s cold comfort, given wholesale natural gas prices here are roughly double what they were in February. Where will prices go from here? It’s impossible to say—or at least I’d be doing something different if I knew the answer—but given all the uncertainty surrounding the Russia-Ukraine geopolitical situation, the unprecedented European energy crisis, and the fact that US natural gas reserves sit roughly 10% below their historic average for this point in the season, we’re likely in for a winter of elevated prices.
Going Forward into the Winter
What does this mean now that we’re headed into winter? In the best case scenario, we’re likely looking at energy prices equal to last winter, and at the very worst, we’re looking at a situation potentially much worse. The National Energy Assistance Directors’ Association (NEADA), the national organization for state low income energy assistance programs, forecasts energy prices on net to be 17% higher than last winter. When looking at those of us who heat our homes with natural gas specifically, NEADA projects costs to be 34.3% higher than last winter, and 15% higher for liquid propane customers. Keep in mind these numbers are on top of already elevated prices relative to the 2020-2021 heating season, and don’t account for the per-therm polar vortex fee.
One potential bright spot for US consumers is electricity costs. NEADA projects electric rates to be 6.9% higher nationally versus last winter, due in large part to electricity rates being regulated by state utility boards, and that as the electricity sector greens over time, it becomes less susceptible to fluctuations in fossil markets. I recently ran calculations of heating costs on a per-BTU energy basis by fuel type, and the cost of operating an electric air source heat pump in our climate is now on par with a high efficiency condensing natural gas furnace, and well cheaper than a high efficiency LP gas furnace.
Practically Speaking, how Can You Prepare?
What can you do to get ready? First of all, go after all the low hanging fruit like air sealing and making sure your furnace is in good working order.
Generally speaking, the biggest sources of air intrusion/extrusion through a house are the basement and attic. In the basement, make sure plates and joist-foundation interactions are tight and sealed, that basement windows aren’t leaky, and that any existing unused chimneys are properly sealed. At the top of the house, make sure light fixtures, attic hatches, and any obvious and accessible building system protrusions into the attic are properly sealed.
Check your exterior doors to make sure sweeps are functioning properly, and that weatherstripping along the sides sit tight against the closed door. If your windows are old and drafty, consider rope caulk, a rolled, stiff, caulk-like product that can be pushed into the sash-stops and meeting rails. It works beautifully, is cheap at about $2 a roll, and doesn’t leave residue when you remove it in the spring. And of course there’s the old window film treatment.
Make sure your furnace is in working order and that its filter is replaced. A new furnace filter will both improve indoor air quality and overall system efficiency.
Beyond the low hanging fruit, consider having the Winneshiek Energy District conduct a first-step home audit. Depending on your location, age, and household financial status, we might be able to provide this service for free. We’ll use a blower door to find specific leaks, change your light bulbs, and identify opportunities for efficiency improvements. We can also conduct more thorough and comprehensive home energy audits and plans for a fee.
If you find yourself falling behind on your electric and gas bills, reach out to Alliant and Black Hills to set up payment arrangements and extensions. And remember, under Iowa law, utilities are prohibited from disconnecting you from service from November 1 until April 1, regardless of your bill payment status.
If you’re a renter or homeowner, and are at or below 200% of federal poverty income guidelines, you’re likely eligible for payment assistance, energy crisis assistance, and weatherization and energy-related home repairs through the Low Income Home Energy Assistance Program. For more information contact the folks at Northeast Iowa Community Action.
Longer Term: The Inflation Reduction Act
Longer term, we’re really excited about several consumer rebate programs and tax credits available through the recently enacted Inflation Reduction Act. The High-Efficiency Electric Home Rebate Act will provide folks making up to 150% of the area median income level (which for an Iowa household of two is up to $91,220) up to $14,000 in assistance installing heat pumps for space heating and water heating, induction stoves, heat pump clothes dryers, new electrical breaker boxes, wiring, and insulation. The Home Energy Performance-Based Whole-House Rebate Act will help income qualifying and non-income qualifying households with assistance up to $8,000 to lower overall energy use. But unfortunately, both of these programs will not be available till sometime next year, and definitely after the coming heating season.
The Inflation Reduction Act also contains several tax credits, including credits for heat pumps for both space and water heating, new windows and doors, electrical breaker boxes, solar, battery storage and electric vehicles. And like the rebate programs, most of these will not be available until January 1, 2023.