Which Holds the Real Price Advantage?
Mark C. Beyer is chief economist of the New Jersey Board of Public Utilities. This article expresses his views and not necessarily those of the New Jersey BPU, its commissioners, or its staff.
On an average cost basis, natural gas currently holds the price advantage in hot water and space heating markets. However, on a marginal cost basis, electricity may present price challenges to drive consumer choice away from natural gas if real-time pricing, thermal storage and digital control options are made available to consumers.
Average Cost Pricing
The price of natural gas based on average costs is currently considerably lower than the price of electricity based on average costs; however, the marginal cost of natural gas may be considerably higher than the marginal cost of electricity.
The price, or average cost, of electricity or gas service is normally expressed per unit of output. This is obtained by dividing the cost of service, including fuel, appropriate operating expenses, depreciation and taxes plus a fair return on invested capital, by the output, expressed in terms of kilowatt hours for electricity or therms for natural gas.
This type of pricing is referred to as average cost pricing. It is contrasted with marginal cost pricing, which is the change in total costs that results from the addition of one unit to total output.