Archive for the ‘Natural Gas’ category

Natural Gas Prices Can’t Rise Soon Enough

June 29, 2016

Natural gas prices have dropped sharply over the past two years and while the prospect of paying higher prices for energy is not appealing, unless prices rise soon, the prices we pay later are likely to be much higher and for much longer than currently forecast.  The chart below shows the decline in natural gas prices over the past two years.  In response,  a steady rise in production of U.S. natural gas stagnated and began declining over the past year.             1

One impact of very low energy prices is a U.S. energy industry that is in financial shambles, devastating industries that support oil and gas extraction and threatening the financial institutions that lend to energy-related industries along the way.    In the first quarter of 2016 the largest shale gas producer in the world had negative cash from operations.  Most other large producers similarly had revenues from the sale of oil and gas that didn’t cover operating costs much less capital expenditures like drilling and completion. Sympathy for energy companies isn’t expected and won’t be forthcoming but the result of consistently low energy prices is predictable, lower U.S. oil and gas production.  The longer prices for natural gas remain very low, and the smaller and financially weaker the industry gets, the less likely production will be able to ramp-up as prices rise (as they most surely will) and that means even higher prices in the future and for a longer period of time.

The Importance of Shale Gas

The U.S. is increasingly dependent on shale gas. Conventional natural gas production appears to be in terminal decline as fewer producers are drilling those wells.  Shale gas now represents more than half of all natural gas produced in the U.S. (and rising).  Production of shale gas will have to continue to increase just to compensate for the decline in the production of conventional natural gas but recently shale gas production has also begun to decline.  2

The Marcellus and Utica shale gas regions (closest to NH) are relatively new sources of shale gas (production began in the mid-2000s).  They, Marcellus in particular, are the  kings of shale gas in the U.S..  Not surprisingly they have, on average, the lowest cost-of- production of any shale gas region in the country.  As a result, production in those regions has been maximized and the percentage of U.S. shale gas that comes from the Marcellus and Utica shales is now almost 50 percent.  That percentage probably would be even higher except for pipeline capacity that limits movement of gas from the region.

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But even in these lower cost-of-production regions the lowest cost producers have a breakeven price of about $3.50-$4.00/MMBTU (the average of all producers in the regions is higher).  Meanwhile natural gas prices in the U.S. have been below $3.00 since 2015 and below $2.00 in 2016.  The average production costs in shale regions that have been producing longer is considerably higher (from about $5.00/MMBTU to more than $6.50).  The impact of natural gas prices on the production of increasingly important shale gas is best understood by looking at the impact that prices have had on different shale gas producing regions across the country.  The chart below shows changes in production from each shale play’s peak production to May of 2016, when spot natural gas prices were at $1.92/MMBTU.  As economics would predict, the chart shows that production declines were greatest in the highest production cost regions and smallest in the lowest cost Marcellus and Utica Shale regions. On a percentage basis declines in production appear even more dramatic.  Production has declined 50 percent  in the Haynesville shale region of Louisiana and Texas since peak production occurred there in 2012.  The Barnett (Texas) and Fayetteville (Arkansas) shale regions experienced production declines of 39 and 26 percent respectively since 2012.  In contrast the lower cost Marcellus (0.4%) and Utica (2.0%) experienced minimal declines in production and only in 2016 when spot prices were under $2.00/MMBTU.

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But here is the thing, like all gas and oil producing regions, the longer the Marcellus and Utica shales produce gas the more likely production cost will rise as increased withdrawals require production to move from core areas of the shale play to more marginal areas of production.

Prices and Costs Matter

Only in a fantasy world will U.S. production of natural gas continue to increase for decades with prices remaining near or below breakeven costs.  In the real world prices and costs matter.  I am a fan of natural gas and believe increasing availability in New England will benefit consumers and businesses but thinking that natural gas can be simultaneously cheap, abundant, and profitable defies the rules economics.

Unfortunately I think the U.S. Energy Information Agency is contributing to a fantasy by suggesting an almost unlimited supply of natural gas at low prices in their forecast of natural gas production and prices contained in the EIA’s  2016 Annual Energy Outlook (released in May).  I respect the work of the EIA and regularly rely on the data they produce but this forecast seems to lack a fundamental grounding in economics.

5

At $6.00/MMBTU (in 2015 dollars)the U.S. will have an ample supply of natural gas for decades.  At $5.00 (not reached until 2024 in the EIA forecast scenario) production is unlikely to increase by 50 percent as the EIA forecast suggest. At prices below $3.00 for long, as is the current case, production will decline significantly and supply shortfalls will require supplementing U.S. production with ever larger withdrawals from storage, increasing imports (questionable if that is possible) and/or  a reconsideration of the exporting of natural gas.  It is important to note that shortfalls in production don’t mean there won’t be enough natural gas, there is ample gas in storage to cover shortfalls for a while but prices will rise quickly as more gas is withdrawn from storage.  Rising prices should prompt increases in production but things may be different this time, depending on how soon prices rise.  The industry is smaller, financially weakened,  and unlike a few years ago capital, as well as workers who were forced to leave the industry as it shrank, may not be as readily available to ramp up production as prices rise.

As we know too well from experience, natural gas supply shortfalls have more dramatic and especially harmful impacts on New England.  New Hampshire and the rest of the country would be better off with a modest rise in natural gas prices now rather than face supply shortfalls and much higher prices in future years.

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A Pyrrhic Victory for Pipeline Opponents

June 2, 2016

Another energy project has been scuttled that could have provided some relief to New Hampshire and New England households and businesses who are paying among the highest prices for energy of any state in the nation. I believe the project would also have contributed to the important goal of reducing carbon emissions in NH and New England (more about my support for reducing carbon emissions and some controversial policies to accomplish that in a future post).  No doubt any proposed energy project is better when forged and tempered through a process of public review and debate.  But the withdrawal of proposed wind energy projects, and more recently the Northeast Energy Direct (NED) natural gas pipeline project, as well as the difficulties encountered by some solar projects in the state, question how committed many residents and some policymakers in NH are to finding solutions to an energy climate that is widely recognized as detrimental to households, businesses, and the NH economy.  As opponents of  pipeline, wind, and solar projects claim another “victory” in NH, an admonition given to Pyrrhus, a Greek general and ruler of Epirus comes to mind.  After a costly victory over his Roman enemies by Pyrrhus, the Greek philosopher Plutarch reportedly told Pyrrhus that another, similar “victory” would ruin him.  If the “ruin” that could occur only affected the combatants in NH’s  energy infrastructure battles, instead of the 1.4 million non-combatant “energy civilians” in the state, Plutarch’s warning might be useful.  But there are no “generals” and no real leaders or statesmen and stateswomen battling NH’s energy constraints and so the casualties of our state’s inability to take control and direct its energy future will be most broadly spread across the state’s population.

This post highlights some of my calculations of the costs to NH of the defeat (or victory as opponents would argue) over the Northeast Energy Direct natural gas pipeline proposal.  To begin, let’s reiterate the cost disadvantages faced by consumers of electricity in NH.  The chart below shows that through 2014, residential and commercial electricity customers paid, on average, about 35 percent higher rates than the national average, while industrial customers paid a whopping 70 percent higher rates than the national average.

energy prices

The NED Project’s Impact on Natural Gas and Electricity Prices

Natural gas prices have been lower in recent years as a result of increased U.S. production, largely from the Marcellus and Utica shale formations in  Ohio and Pennsylvania.  But as I noted in this post, a lack of pipeline capacity precludes NH and New England from realizing the full benefits from declining natural gas prices.  The increased supply of natural gas from nearby sources enabled by the Northeast Energy Direct project would impact natural gas prices in NH and New England.  Price reductions would result in direct savings to residential, commercial, and industrial consumers of natural gas and would also result in electricity prices that are lower in NH than without the Northeast Energy Direct project. New England’s wholesale power prices are closely related to natural gas prices because of the region’s dependence on gas-fired power generation capacity. By reducing spot prices for natural gas in New England, the NED Project will have a direct impact on New England’s wholesale power prices.

At least eight separate studies have forecast lower natural gas prices in New England resulting from an increase in pipeline capacity into the region.  Even one study from the Massachusetts Attorney General’s Office, while suggesting an increase in pipeline capacity to New England isn’t needed to assure reliability of electricity supplies in the region (inaccurately I believe and contrary to reports by others, including the operator of the New England Energy grid), recognizes that increased pipeline capacity would result in lower regional natural gas prices.

 There is a range of estimates of the price impacts from an increase in natural gas supply to the region. My estimates of energy cost savings in NH use one of the more conservative estimates of the price impacts of increased supplies to the region as documented in a study  by ICF International. I used historical data on both natural gas and electricity consumption by sector (residential, commercial, industrial)  in NH from the U.S. Energy Information Agency (EIA) as well as forecasts of future consumption based on the EIA’s regional forecast for growth in natural gas and electricity consumption and applied ICF natural gas and electricity price reduction estimates to consumption forecasts in NH to estimate savings to customers in the state that would result from the operation of the NED pipeline.  In the initial full-year of pipeline operation I estimated the savings to natural gas and electricity consumers in NH to be $165.5 million.  The breakdown of saving by source and sector is presented below.  Savings represent about 3.4 % of the 2014 energy expenditures of NH residential consumers, 6.5% of commercial sector energy expenditures, and 8.9% of the energy expenditures of industrial consumers.

savings by sector

 Using the same sources and methods, I estimate the 10 year energy cost savings to NH natural gas and electricity consumers  would be just under  $2.2 billion in nominal dollars as a result of the Northeast Energy Direct project.

10 years savings

Additional Benefits of Increased Regional Access to Natural Gas

There are other potential benefits from NED that have been less talked about.  Much of NH has limited or no access to pipeline natural gas from local distribution companies.  The lack of access to natural gas increases energy costs for households and businesses in many regions the state.  In particular, lack of access increases the economic disadvantages currently faced by most rural regions in the state.   Natural gas is most available in the populated regions of Southern NH closest to regional pipelines and the lateral pipelines operated by local utilities who purchase natural gas from the regional pipeline operators.  The proposed NED pipeline would have passed through a portion of the state where the economy has lagged for some time and regions that could most benefit from access to pipeline natural gas.  The NED would increase capacity but local utilities would have to add lateral pipelines to serve communities, households and business in places like Keene, Claremont, Cheshire, Sullivan and Grafton Counties.

Along with extremely high electricity prices for industrial consumers relative to the U.S. average, the lack of access to natural gas is a significant disincentive to operating a manufacturing facility in much of New Hampshire, as nationally, natural gas accounts for 40 percent of the purchased energy of manufacturers on a BTU basis.  There is anecdotal evidence that manufacturers nationally are starting to react to lower natural gas prices by planning to open new facilities in the United States. There are other influential factors, including rising employment costs overseas, but those industries for which natural gas is an important input are anticipating an advantage of locating their operations in the U.S..  Cheshire and Sullivan Counties are among the most manufacturing dependent regions in the state and access to utility natural gas would especially benefit communities in those regions.  The chart below presents location quotients which represent the concentration of manufacturing employment in each NH county relative to the concentration of manufacturing employment in the U.S. overall. A location quotient of 1.00 indicates a region where the concentration of manufacturing employment is identical to the concentration of manufacturing in the the U.S. economy overall.  Location quotients above about 1.20 suggest counties where manufacturing is especially important to the regional economy.  Shaded bars represent counties through which the NED project would pass. The NED would not pass through Sullivan County but its proximity would make lateral access to gas from the pipeline feasible.

manufacturing LQ

Increased natural gas supplies and lower prices will be especially helpful to smaller manufacturing firms which face higher prices in New England but also face larger natural gas price differentials relative to larger manufacturers than anywhere in the country.  High prices and larger price differentials create a strong disincentive for new and emerging manufacturing firms to operate in New Hampshire and may be contributing to an “aging” in the manufacturing sector in the state.

gas prices to manufactures

Access to natural gas would also benefit households. Just under 20 percent of households in New Hampshire use pipeline natural gas for heating and another 13 percent use bottled gas but there are large regional variations in the availability of natural gas for heating.  Again, regions of the state that are considered economically disadvantaged, in most cases, have the least access to pipeline natural gas.  Access to pipeline gas won’t guarantee a reduction in disparities in the economic performance of various regions of NH but it would help households and manufacturers in regions where the economic performance has lagged.

home heating in NH by source

The savings for households heating with pipeline natural gas is substantial. The table below shows the average cost differential in annual heating costs between housing units heated with pipeline natural gas and other sources.  The difference between pipeline natural gas heating and fuel oil – the largest source of home heating fuel in NH – averaged over $890 annually between 2010 and 2014. By lowering natural gas prices the differential between homes heated with natural gas and other sources (other than solar) are likely to widen.  The NED would  increase opportunities for more communities, regions and more homes to be heated with natural gas in New Hampshire, amplifying the potential savings estimated here for NH households and the NH economy associated with lower natural gas prices.

Table copy

Factoring the impacts of the NED project on natural gas prices and disposable income for  residential consumers (and not including the impacts on commercial and industrial consumers)  I estimate that an additional 5,300 jobs would have been created in the first 10 years in response to the energy cost savings to households from the NED project.  When the impacts on industrial and commercial consumers are considered the potential benefits of the project become even clearer.

Disclosure

I originally prepared more detailed estimates (than in this post) in a report I did for the proposed NED project.  I write this blog (when I have time) because I enjoy researching and writing about topics that interest me, not to advance client interests. I think the report contained some good analyses and now that the NED proposal has been withdrawn and the company is no longer a client, I don’t feel conflicted writing about it here.  The success or failure of the NED project had no impact on the compensation I received. The report addresses energy issues in NH that I have been writing about since long before my work for the NED project. It examines the usual economic impacts from the construction phase of the project but more importantly potential longer-term impacts of the project.  The report also examines controversial topics such as potential impacts on tourism activities as well as fiscal impacts of the project.  The report can be viewed here. Because the report was paid for by the NED project owners, critics will dismiss some or all of the findings.  But a report that is paid for only means that its author(s) has some “skin in the game.” In a small state, and especially in NH, anyone who produces work that distorts findings or misleads policymakers won’t be offering services of  value and won’t be working in the state for long.  On the other hand, anyone without “skin in the game” or some compensated interest is pretty much free to make any claim without evidence, present any data, or any “analysis” regardless of its accuracy, without concern for the impact that it has on their business or professional reputation. I am not arguing that any information brought to policy debates that isn’t paid for has no value or is necessarily inaccurate or misleading, just that information that is not paid for by some interests is not is inherently or by definition more accurate or relevant than work that is paid for – there should be no “halo effect” for information entered into important policy debates simply on the basis of whether or not compensation was involved – compensated or not, information entered into the debate is provided by a party with a particular interest in the issue.  The quality and accuracy of the analysis should determine its merits.  I like to think that the ultimate test of the quality of an analysis is whether those who produced it will be around and willing to answer for its accuracy or inaccuracy when the time comes when that can be determined.  I don’t think my analyses (or forecasts) are wrong that often but when they are I am available to answer to policymakers and others for it.  I don’t think I would have had to answer for my my analysis of the impacts of the NED.

A Crisis of Our Own Making

December 29, 2014

Increased shale gas production as well as a December that is on pace to be the ninth warmest nationally since 1950 has natural gas prices in the U.S. plummeting by 18% in the last three months. Natural gas futures for January delivery fell to $3.144 per million BTU on the New York Mercantile Exchange. These all suggest that a crisis in the New England energy market caused by natural gas price spikes will be less than many predicted this winter.

To be clear, to this point the New England energy “crisis” has largely been a winter phenomenon. The chart below shows the weighted average price of natural gas for electricity generation in New England and the U.S. It shows, natural gas prices for electricity generation are roughly the same in New England and the U.S. with the exception of the winter months, when increased demand for home heating along with the region’s increased reliance on gas-fired electricity generation combine to exceed the capacity of the limited natural gas pipelines in the region. The result is a limited supply and exceptionally high natural gas prices for power generation in the region. As the chart shows, the premium (over average U.S. prices) paid for natural gas by New England power producers has increased each of the past several winters. Abundant supplies and lower prices nationally and a winter forecast of 11% higher mean temperatures compared to the Winter of 2013-14, will lessen but not eliminate natural gas issues or the larger issue of longer-term energy production in the New England region.
Cost of nat gas for generation

The chart below graphically depicts perhaps the most fundamental problem confronting the New England energy market, one that currently prevents the region from fully realizing the benefits of our nation’s booming production of natural gas. The chart highlights the dearth of natural gas pipeline capacity in the New England region compared to most other regions, including much more sparsely populated regions of the country.

ngpipelinesThere is a reason the chart shows a concentration of pipelines in Ohio, West Virginia, Pennsylvania, and other nearby (to New England) Eastern states. These states currently produce about 40% of the nation’s shale gas but they promise to produce an even greater percentage of the nation’s gas in the future. Together, these states (along with small amounts from states near them) hold over 60% of the proved reserves of shale gas in the entire U.S. according to the U.S. Energy Information Agency. Unfortunately, the chart also shows that the increasing number of pipelines emanating from the region don’t make their way into New England. When the U.S. was more at the mercy of the exigencies of the world’s energy suppliers than it is now, New England had someone to blame for its energy disadvantages. With an emerging abundance of natural gas so close by, it is more appropriate to ask ourselves why we don’t benefit from the boom in nearby production.

shale gas productionNew England is not a region that produces its own fossil fuels but few areas of the country do and they still manage to avoid the sort energy “crises” that periodically plague New England. To the extent that there is an energy “crisis” we have nothing or no one to blame but ourselves. Natural gas is generally more expensive in New England but not always for electricity generation, except during a few months of the year when pipeline constraints are the culprit. New England is “retiring” older “base-load” power plants but so are many other regions – seven coal-fired power plants that I know of in Ohio and another five in Western Pennsylvania alone. But these are also states where new gas fired power plants or other generating facilities are being built to replace them and neither of these regions is straining their natural gas pipeline capacity by adding new, gas-fired power plants. I have done studies for three new gas-fired power plants in Ohio in recent years and although subject to just as much regulatory and public scrutiny, none of the facilities faced the kind of parochial opposition characteristic of most proposed projects in New England. I have also done work on a wind energy project in New Hampshire and it faced as much or more opposition as would any fossil fuel generating project. In New England it seems, any energy project with a public benefit is seen as synonymous with trampling some individuals’ rights.

Whatever the extent of the looming energy crisis in New England it is of our own making. If you don’t want renewable energy production (wind, solar, hydro etc.), gas-fired power plants and the pipelines needed to support them, or any other power producing facilities built, you have no right to complain about the availability or cost of energy in the region. Personally, I would like to see more renewable energy produced in New England and New Hampshire but that doesn’t mean we should refuse the benefits from a greater supply of natural gas. If we do, we will only put ourselves at a greater energy disadvantage than we already face. There are many reasons (aesthetic, environmental, etc. technical) why renewables are not a more favored option for generating electricity in the U.S. but most of the arguments in opposition are based on costs. Too often these arguments are made by ideologues, vested interests, and others with an agenda, most of whom have no idea of how to measure the true cost (levelized cost of energy or LCOE) of production by different generation sources or the hidden as well as direct subsidies provided to each.

Despite highlighting the increase in natural gas production this is not a post about the merits of hydraulic fracturing. In the coming years the benefit/cost calculus of “fracking” will be refined. This post is about whether New England will realize any of the benefits that result from an increasing supply of natural gas in the country. I have written before that I do not believe energy prices are the root cause of New Hampshire’s recent slower economic growth (we have had high relative energy prices during the state’s boom periods and New Hampshire is producing more goods and services with a lower energy content per dollar of gross state product than ever before). But even if not a savior, a more stable and abundant supply of energy resources at lower prices would have real economic benefits. Whatever your views of its merits, there is little doubt about the impact of the boom in shale oil and gas production on U.S. energy independence, it will no doubt alter the economic, fiscal and the international geo-political landscape of the country. In ten years it is quite possible that the only nation from whom the U.S. imports oil is Canada. Whether the shale oil and gas boom also alters the prospect for NH’s energy and economic future is less certain but is almost entirely within our control.

The Outlook for Natural Gas Prices in New England

May 3, 2013

There is a lot of discussion, debate, advocacy and lobbying about whether New England’s energy future is becoming more vulnerable because of the region’s increasing reliance on natural gas for electricity generation.   Some see the prospect of rising natural gas prices (because of increasing demand in the region and nationally) as a vulnerability and others are concerned about constraints on the pipelines that bring natural gas into the region.  I’ve posted a lot about natural gas and electricity related issues and as I have previously stated my belief that regional increases in demand along with greater U.S. production of natural gas are more likely than not to create scenarios that will increase the capacity of the regional pipeline infrastructure. New England has traditionally been a region with a relatively low percentage of its energy consumption in the form of natural gas.  That is changing rapidly, but increases in U.S. production of natural gas along with demand driven incentives to increase infrastructure capacity in the region should reduce a lot of the volatility of natural gas prices in New England.

Apparently there are other folks who feel similarly.  The U.S. Energy Information Agency (EIA) released its “Annual Energy Outlook” last month and it has a wealth of historical data, forecasts and projections.   Their forecast of natural gas prices across the country are based on many economic, energy demand, production and other variables.  They also produce a range of forecasts based on different assumptions about economic growth , energy demand and prices.  The good news is that their baseline forecast for natural gas prices in New England (chart below) shows that  prices in the region, which are traditionally higher than in most other regions of the country, are expected to align with the national average early in the next decade, and then move lower than the national average over time.  Even better news is that this forecast is not dependent on a much weaker economy in New England than in the rest of the country (which would imply lower increases in energy demand in the region compared to the rest of the country).  I don’t think EIA would be forecasting lower relative prices in New England if they did not see  region’s pipeline infrastructure issue as being addressed.
NE Nat Gas Price vs US Forecast
The EIA also projects that the price of natural gas relative to coal will continue to increase.  Coal will probably almost always be a cheaper fuel than natural gas but today’s typical “combined-cycle” natural gas generating facilities are much more efficient than coal-fired plants.  When the ratio of natural gas prices to coal prices is approximately 1.5 or lower, a typical natural gas-fired combined-cycle plant has lower generating costs than a typical coal-fired plant.   Natural gas-fired electricity generators enjoyed a strong competitive advantage over coal plants in 2012 but natural gas plants will begin to lose competitive advantage over time, as natural gas prices increase relative to coal prices.    The retirement of older coal-fired generating plants, however, will mean that coal continues to generate a smaller percentage of the region’s and the nation’s electricity.

Some see New England’s increased use of natural gas as a concern.  There are issues that need to be addressed but none that are insurmountable or that should have the region reconsider its increasing reliance on natural gas.  Long-range energy price forecasts are notoriously difficult but New England’s energy needs and interests are finally becoming more aligned with the rest of the nation.  For too long New England has been an anomaly as the most oil-dependent and least natural gas-dependent region in the country.  Personally, I would rather have 300 million people concerned about my energy needs than just 15 million.

Electricity Prices Highlight the Benefits of Markets and Choice

March 28, 2013

Four of the six New England states (CT,ME, MA and NH) had lower average retail prices for residential electricity customers in January of 2013 than they did in January of 2012 (chart below).

Chang in Avg Retail Price of Electricity

Most of that is a result of the increasing sales into the region’s electricity market  of electricity generated by natural gas which is priced lower than the electricity generated using other sources.  The decline in the average price in NH is smaller than in some other states but it could have been, and could still be,  larger if retail competition in the residential electricity market takes hold.   The chart below shows the average cost of retail electricity for residential customers in the continental United States in January of 2013.  New Hampshire and all of New England have among the highest average rates but based on the contract information from the largest competitive suppliers of residential electricity in New Hampshire, the average price would be significantly lower (at least until November of 2013) for those who choose the lowest rates available from competitive suppliers (other higher rates are available that let customers choose to purchase a higher percentage of electricity generated from ‘green” sources).

Avg Residential Price of Electrictyby State

I was going to make this a much longer post and include a discussion of why the warnings by some about an “over-reliance” on natural gas in the region are overstated but not inaccurate (the natural gas pipeline limitations to the region are real but more likely to be remedied than not with increased natural gas usage in the region) but I will save that for another day.  The reputation and belief in free(er) markets and competition have taken a beating over the past several years so  for now I am just going to enjoy highlighting  of  one of their recent successes.

Between a (Black) Rock and a Hard Place

March 19, 2013

If I am the state’s largest electric utility I have to be hoping that the limited natural gas pipeline infrastructure that supplies the New England market never gets expanded, that shale gas production has even more environmental impacts than it appears to now, or preferably both.  I’ve written probably too many times about the electric power industry (as well as the commercial and industrial sectors) switching to natural gas (primarily at the expense of coal but also oil) because of its lower carbon intensity and significant decline in price over the past decade.  Increased demand for natural gas along with New England’s limited pipeline infrastructure have caused natural gas prices to rise in New England more than in most other parts of the country but I don’t think that is reason to “jump ship” from natural gas.   Natural gas production is increasing and it will likely be sometime early in the next decade before the increase in demand for natural gas in this country outstrips growth in supply (even though it feels like it in New England because of our pipeline limits).  Coal is cheaper and becoming cheaper still for good reason, the demand for coal as a fuel for electricity production is declining rapidly and despite being a lower cost fuel, that doesn’t mean facilities that burn coal can sell electricity more cheaply than can producers using more expensive fuel.

I  briefly noted how electric power gets sold into regional markets in an early post.  The Cliff Notes version of that is this: The suppliers of electricity (generating companies) in a region offer to supply electricity to the market at a given price and the offers are accepted beginning with the lowest cost providers first, until enough energy is supplied to meet expected demand in the region.  The price of electricity offered by the last electricity generator needed to meet the regional demand determines the market price paid by companies that supply the electricity to businesses and consumers.

So here is the rock (black) – our state’s largest utility has a large generating facility that burns cheap coal but because it costs a lot to burn coal in a way that doesn’t make NH look like Beijing on a bad day, the price of that electricity is high relative to other electricity producers in the region who are also offering their electricity in the regional market (primarily natural gas  generators).  The electricity generated by the coal burning facility has increasingly not been sold into the regional market.  As the graph below shows, the longer-term trend indicates that the percentage of New England’s electricity that is generated by Merrimack Station has been cut by more than half.  It is a 12 month moving average to smooth the results and prevent readers from getting nauseous from bouncing lines, but the trend is clear and troubling if you are a generator with a coal-burning facility.

Merrimack Station

The “hard place” is the growing loss of its residential customer base as retail competition finally takes hold.  A lot was made of the financial difficulties of one competitive supplier to NH’s residential market and the resulting return of its customers to the default service provider, but anyone who thinks that is going to stop the train from leaving the station is going to find themselves looking for another way to get to their destination.

When your generating business is weakening and your retail business is declining, all that is really left for growth is your transmission business.

The Stone Age Didn’t End Because of a Shortage of Stones

January 24, 2013

The operator of the New England power grid (ISO New England) issued a media release yesterday noting that because of the decline in natural gas prices, overall, wholesale electricity prices in the region dropped in 2012.  Reader”s” (if there is more than one) of this blog know I write a lot about energy issues and have noted the trends and benefits of natural gas to energy prices in the region (here, here, here, and here as well as in posts about other energy issues).

Increased U.S. production of natural gas has resulted in price declines and price declines are resulting in more fuel switching that will put more pressure on the price of natural gas unless production increases faster than increased demand.  U.S. production of  natural gas is likely to continue to increase faster than other fossil fuels (see chart below), but increased fuel switching will put more pressure on natural gas prices.

US fossil fuel production

One problem for New England is that our infrastructure for delivering natural gas to the region is the weakest of any region of the country and one result is that unless or until that changes, we won’t benefit as much as other regions from increased production.  The chart below shows a forecast of real, inflation adjusted fossil fuel prices to 2040.  Nationally, natural gas prices will rise faster than coal, but more slowly than oil.  The natural gas price trends here are for prices at Louisiana’s  Henry Hub distribution point (the reference price for natural gas prices), New England prices are higher but the question is, how much faster or slower will they grow in New England?  Improved infrastructure would help.

US fossil fuel prices

Coal is abundant and prices will grow relatively more slowly, but the economics of coal as an energy source still don’t give it an advantage over gas.  Over the next 3-5 years over 200 coal-fired electric generating plants will be retired according to a coal trade group.  They blame environmental regulations but there is more to it than that.  Besides the greatly narrowed gap in fuel costs between natural gas and coal, the fact is most people don’t want coal used, or have it used near them.  The cost of burning coal more cleanly is relatively high (it’s not just regulators that impose those costs, it’s the only way a majority of the public will support coal and if it costs too much they wont support it as long as there are more competitively priced alternatives – as there are now). Finally the cost of constructing a coal plant, compared to combined-cycle natural gas power plants is much higher (even without the new equipment required to reduce emissions) and they take longer to build 4-5 years compared to 2-3 years for natural gas, making financing of such projects more difficult.

I am not a coal hater.  Although I have worked on many more combined-cycle natural gas electric generating plants, I have also worked on two or three electric generating projects that burn coal, most recently one involving super-critical clean coal technologies and carbon capturing,  but phasing out older, less efficient, coal-fired plants makes perfect sense and can be done over time without jeopardizing the reliability of the grid if new natural-gas fired plants are built.  Relying just on natural gas doesn’t solve our  CO2 problem but it helps (ok deniers, let loose – I am a believer that CO2 is a problem that needs to be addressed).

The point of this post (by now you are probably asking if there is one) is that fossil fuels are not going away anytime soon.  Not too long ago there were apocalyptic predictions about the availability of fossil fuels in the future.  Those predictions aren’t proving accurate but at some point fossil fuels will run out.  Not in my lifetime, which is a good thing for my business as long as I still can get hired to work on natural gas or (gasp) coal-fired electric generating projects.   But more abundant fossil fuel doesn’t (or shouldn’t) lessen environmental concerns over its usage.  The stone age didn’t end because of a shortage of stones and the fossil fuel age shouldn’t wait to end until we run out of it.  Somebody will have to pay for developing new technology that ends the fossil fuel age.  Unless we start now,  the cost of the U.S. debt that we pass down to future generations will look small compared to the costs of developing new energy technologies that we will be passing down in the face of genuine declines in fossil fuels.  It is not just a matter of  increasing renewable energy,  although that will help.  Solar and wind and even hydro generation suffer from over/under demand issues.  Balancing power output to need is extremely problematic once you try to get renewable power above 20% of total generation, new technologies need to be developed.

The stone age was replaced because newer and better technologies were developed despite an abundance of stones, lets hope the same is true for the fossil fuel age.


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