Natural gas and Electricity Rates

How The Price of Natural Gas Drives Texas Electricity Rates

Natural gas plays a significant role in the Texas electricity market, affecting both the generation and pricing of electricity for consumers.

Key Takeaways

  • Natural gas accounted for over 47% of electricity generated in Texas in 2022, a significant increase from 15% in 2000.
  • The use of natural gas for electricity generation in Texas can result in lower electricity rates for consumers due to the fuel’s relatively low cost.
  • The availability and cost of natural gas can fluctuate, which can lead to increased electricity rates.
  • The reliance on natural gas for electricity generation also has environmental consequences.

According to data from the Energy Information Administration, natural gas accounted for approximately 47% of the electricity generated in Texas in 2022. This is a significant increase from just 15% in 2000. In the past couple of decades natural gas has grown to be the dominant fuel source for the Texas electricity grid.

One major benefit of using natural gas for electricity generation is its relatively low cost compared to other fossil fuels such as coal. The Texas electricity market is designed to allow competition to pass lower fuel costs on to the consumer.   This can result in lower electricity rates for consumers as the cost of generation is passed on to them. In fact, data from the Public Utility Commission of Texas shows that the average retail electricity price in the state was 8.6 cents per kilowatt-hour in 2020, which is below the national average.  In the years after 2020, however, the price of natural gas went up significantly driving up electricity rates.

This chart for the Dallas Federal Reserve illustrates the strong correlation between natural gas prices and Texas electricity rates:

Natural gas and Electricity Rates

The low cost of natural gas is not the only factor that affects electricity rates. The availability of natural gas, as well as the infrastructure to transport it, also plays a role. For example, during times of high demand, such as extreme weather events, the price of natural gas can spike.  This can result in higher wholesale electricity rates.  This, in turn, puts upward pressure on retail electricity rates. This is similar to how the price of gas fluctuates at the pump, when there is a shortage, the prices goes up.

The Risks of Reliance on Natural Gas for Electricity

Overall, while natural gas has played a major role in keeping electricity rates low in Texas, it is important for consumers to understand the potential impacts of the state’s reliance on this fuel source. It is important to keep in mind that natural gas prices and availability can fluctuate, and the use of natural gas for electricity generation does have environmental consequences.

Having the price of natural gas drive electricity rates can be a boon during periods of low natural gas prices.  But the flip side of the coin can led to dramatic upswings in electricity rates.  Texans learned this the hard way in 2022.

The cost of electricity in Texas rose significantly in 2022, due to a combination of factors. But the largest of these was the high cost of natural gas, which doubled over the past year.  The implementation of new regulations by the Energy Reliability Council of Texas (ERCOT) to ensure stability of the power grid in the wake of the major ice storm of 2021 accounted for much of the rise also. These regulations have led to an increase in reserve capacity and higher service fees for consumers.   Additionally, the output from renewable energy sources, such as wind and solar power, fell during the summer months, leading to a greater reliance on natural gas and coal to meet demand.

Geopolitical uncertainty include war in Europe against a backdrop of global inflation made 2022 a volatile year in natural gas.  This translated directly to volatility in Texas electricity rates.


Energy Information Administration, https://www.eia.gov/state/seds/data.php?sid=TX#Electricity

Public Utility Commission of Texas, https://www.puc.texas.gov/industry/electric/rates/

Federal Reserve Bank of Dallas https://www.dallasfed.org/research/swe/2022/swe2204/swe2204e

See Also: World’s Largest Carbon Capture Facility To Be Built Near Houston

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