Summary of recent Energy News headlines

There are a number of energy stories that are making business headlines these days. The unifying themes for this week’s energy market news summary are: a prediction from a Forbes contributor that we’re headed to $8.00 natural gas, a summary of today’s discussions at the US conference of utility regulators (NARUC)–with some interesting analysis about fuel diversity in US markets, and concern about the impact of extreme weather on US’ energy infrastructure.

The cost of natural gas and where it is headed

Sometimes it is difficult to weed out the wild speculation from the natural gas fundamentals. This article from a Forbes contributor, titled “We’re Headed to $8 Natural Gas” makes the case for much higher gas prices by winter, which will result in much higher electricity prices as well. The article presents a thorough look at some of the history of natural gas supply and demand in the US, as well as recent trends. It is a thorough review, and worth reading. In addition to the Forbes article, Morgan Stanley have increased their average price forecast for US natural gas this year by 14% to USD 2.74 MMBTU. The Morgan Stanley prediction is tame compared to the Forbes contributor’s outlook. The Forbes articles says, for example:

So combine 13 year low gas rig counts, declining production levels with resultant ultralow storage injections, shut in gas production, faster than anticipated shale well declines, persistent switching from oil and coal to cheaper and cleaner gas alternatives…..Then consider unending hotter than normal summer temperatures, continued greater than normal nuclear plant outages, a hurricane or two that knocks out Gulf of Mexico natural gas production for a week or two, and a La Nina induced cold winter…….any one of these can light the fuse that pushes the tenuous supply/demand balance into cardiac arrest. That’s the chain and it’s going to lead us to $8.00 mcf natural gas by the approaching winter.

The bottom line for businesses: We have seen an uptick in electricity prices as a result of the recent increase in gas prices (due to lower than expected storage injections). We are hearing, more and more, that we may see more natural gas volatility in the coming months. While we hate to sound like chicken little, it is prudent to keep a close eye on costs and anticipate an uptick in electricity and gas costs over the coming months. Go out and look at buying next year’s electricity contract now. It can’t hurt.

Death, Taxes… and Gas Price Volatility*

The National Association of Regulatory Utility Commissioners (NARUC) is described on their website as the national association representing the State Public Service Commissioners who regulate essential utility services in your State. NARUC members are responsible for assuring reliable utility service at fair, just, and reasonable rates. NARUC members are having their summer committee meetings this week. Greentech Media reported on the meeting in this article titled “Regulators, Day 2: Portfolio Theory Makes Wind and Solar More Valuable”. During the meeting, GE Capital’s Steven Taub made the case for ensuring continued fuel diversity over the coming years, and continuing to enable investment in renewable energy projects. Here is his rationale as described in a Greentech Media summary of the panel discussion:

“we think about them [renewables] in terms of portfolio theory. Having a cost that is fixed, where variability is uncorrelated to the other variability in the portfolio, makes the portfolio as a whole more valuable.” For coal and gas, he said, the price of the fuel is much more of a factor. And because the price of fossil fuels can vary frequently and widely, depending on a range of energy related and non-energy related factors, “it is very difficult for people to have any certainty of what the costs are going to be.”

In addition, Taub described a growing investment in renewable energy, with resulting positive feedback loops. Capital costs of wind and solar projects have declined significantly over the last 20 years, while productivity has doubled.

The bottom line for businesses: Because the fuel is free, it is compelling to integrate some renewable projects in to your portfolio. While most renewable project purchasers (or “offtakers”) will be utilities, larger business customers can also benefit from a direct investment in renewable projects simply to diversify the exposure to fuel price volatility over the longer term. Remember: you are always going to be price takers, so why not manage that risk like you would any other portfolio?.

*Note: Duke Energy CEO, Jim Rogers, was quoted at the NARUC conference by Dennis McGinn as saying

My number one fear is that we will be pushed to build natural gas at the expense of solar and wind. Ben Franklin said there are two certainties in life: death and taxes. To that, I would add the price volatility of natural gas.

What’s next? Locusts?

A quick review of weather-related news–particularly as this news relates to the impact on our infrastructure– makes it sound as if we’re living in the midst of a disaster movie. Kinks in subway tracks, cracked and collapsing highways, overheated cooling ponds forcing generation to shut down. In our last news-related post, we talked about the prospects of weather relief. We haven’t seen it yet. The impact of heat and storms on the country’s infrastructure is significant, according to a story that ran today in The New York Times. State and local governments, as well as utilities and independent system operators are starting to plan for the extremes. Potomac Electric Power Company (Pepco) has been criticized for its lackluster response to extreme weather. A senior vp at Pepco says:

We’ve got the ‘storm of the century’ every year now.

The utility is considering a massive infrastructure project to bury power lines as a result of the frequency of these storms. The article goes on to say:

…heat waves are changing the pattern of electricity use, raising peak demand higher than ever. That implies the need for new investment in generating stations, transmission lines and local distribution lines that will be used at full capacity for only a few hundred hours a year.

The bottom line for businesses: Additional investments required to build a reliable and stable infrastructure that can withstand weather extremes can only mean higher costs for rate payers and businesses– in the form of higher utility tariff rates and, potentially, more supply cost volatility, particularly during extreme events.