February 2017
March 01, 2017 | Revenue & Economic Update
The U.S. Energy Information Administration (EIA) publishes state and national data on the composition of energy sources that are used to generate electricity for the residential, commercial and industrial sectors. Historically, coal and nuclear energy were the two largest sources of electricity for Pennsylvania, comprising over 90% of total electricity generated in 2006. While nuclear energy has maintained a relatively stable share of the electricity generation market since 2006, coal’s share has dropped precipitously.
Over the last decade, coal’s share of electricity generation in Pennsylvania has contracted from 55% in 2006 to 25% in 2016, due, in part, to the increasing prevalence of natural gas. In 2006, natural gas was the third largest source of electricity, comprising 6.2% of electricity generated. Data for 2016 show that natural gas surpassed coal as the second largest source, representing 32% of electricity generated. The rise of natural gas in the market for electricity generation is due to its competitive price, efficiency advantages and lower production costs.
As natural gas comprises a larger share of the market, lower retail electricity prices could materialize as a result. In 2016, the average retail price of electricity in Pennsylvania declined by 1.5%, which was driven by declines in the commercial (-3.7%) and industrial (-4.3%) sectors. The commercial and industrial sectors are more intensive users of electricity, so they would be more likely to seek low-cost suppliers, who benefit from the lower input prices and production costs associated with switching to natural gas. Consequently, lower prices are realized more quickly in those sectors compared to the residential sector.
In the residential sector, retail prices grew modestly, with a 1.1% increase in 2016. This was the weakest annual average price increase in the residential sector since 2013. This may suggest that falling input prices are beginning to manifest themselves in all sectors.
National electricity has experienced similar, yet less dramatic, trends in the last ten years. From 2006 to 2016, the share of electricity generated from coal fell by 19 percentage points, whereas the share for natural gas increased by 14 percentage points. In 2017, the EIA projects that the share of U.S. electricity generation from natural gas will fall as a result of higher natural gas prices.1 The EIA also projects that national retail electricity prices will increase in all three sectors. The regional natural gas market will partly determine whether or not Pennsylvania follows these projected national trends.