Electricity Declines 50% as Shale Spurs Natural Gas Glut: Energy

Electricity Declines 50% as Shale Spurs Natural Gas Glut: Energy

A shale-driven glut of natural gas
has cut electricity prices for the U.S. power industry by 50
percent and reduced investment in costlier sources of energy.
With abundant new supplies of gas making it the cheapest
option for new power generation, the largest U.S. wind-energy
producer, NextEra Energy Inc., has shelved plans for new U.S.
wind projects next year and Exelon Corp. called off plans to
expand two nuclear plants. Michigan utility CMS Energy Corp.
canceled a $2 billion coal plant after deciding it wasn’t
financially viable in a time of “low natural-gas prices linked
to expanded shale-gas supplies,” according to a company
statement.
Mirroring the gas market, electricity prices have dropped
more than 50 percent on average since 2008, and about 10 percent
during the fourth quarter of 2011, according to a Jan. 11
research report by Aneesh Prabhu, a New York-based credit
analyst with Standard & Poor’s Financial Services LLC. Prices in
the west hub of PJM Interconnection LLC, the largest wholesale
market in the U.S., declined to about $39 per megawatt hour by
December 2011 from $87 in the first quarter of 2008.
Power producers’ profits are deflated by cheap gas because
electricity pricing historically has been linked to the gas
market. As profit margins shrink from falling prices, more
generators are expected to postpone or abandon coal, nuclear and
wind projects, decisions that may slow the shift to cleaner
forms of energy and shape the industry for decades to come, Mark
Pruitt, a Chicago-based independent industry consultant, said in
a telephone interview.

Power Earnings Impact

Natural gas for February delivery has fallen to its lowest
level since 2009, dropping 12 cents, or 4.5 percent, to $2.55 in
New York at the close of a Nymex electronic session that ended
at 1:15 p.m. yesterday. Floor trading was closed for the Martin
Luther King Jr. holiday in the U.S.
“You’re lowering the earnings ceiling every time natural-
gas prices drop,” said Pruitt, former director of the Illinois
Power Agency, which negotiates power-purchase agreements for the
state’s utilities.
Price declines are expected to hurt fourth-quarter 2011
earnings and continue to depress profits through 2012, Angie
Storozynski, a New York City-based utilities analyst with
Macquarie Capital USA Inc., said in a Jan. 11 research note.
Hardest hit will be independent power producers in
unregulated states such as Texas and Illinois, which don’t have
the protections given regulated utilities where states allow a
certain level of profits.

60 Percent Decline

The Standard & Poor’s independent power producer index,
which groups Constellation Energy Group Inc., NRG Energy Inc.
and AES Corp., has fallen 60 percent since the beginning of
2008, compared with a 14 percent drop for the Standard & Poor’s
500 Index, according to data compiled by Bg.
Low gas prices drained the momentum from a resurging
nuclear industry long before last year’s meltdowns at the
Fukushima Dai-Ichi plants in Japan, said Paul Patterson, a New
York City-based utility analyst with Glenrock Associates LLC. No
applications to build new reactors have been filed with federal
regulators since June 2009.
Exelon, the largest U.S. nuclear operator, canceled plans
last summer to boost capacity at two nuclear plants in Illinois
and Pennsylvania after analyzing economic factors, Marshall
Murphy, a spokesman for Chicago-based Exelon, said in an e-mail.
CMS Energy’s canceled coal plant, planned for Bay City,
Michigan, would have showcased the newest pollution-control
technology for capturing and storing carbon-dioxide emissions.

Wind Expansion Slows

Investors also are cooling on wind investment because of
falling power prices, a lack of transmission infrastructure and
the possibility that federal subsidies may expire next year. T.
Boone Pickens, one of wind power’s biggest boosters, decided to
focus on promoting gas-fueled trucking fleets after canceling
plans for a Texas wind farm in 2010.
“Boone still sees wind being a key part of America’s
energy future,” Jay Rosser, a spokesman for Pickens, said in an
e-mail. “Natural-gas prices will ultimately rise and make wind
energy more competitive in the process.”
NextEra didn’t include new U.S. wind projects in its
financial forecast for 2013, Lew Hay, chief executive officer of
the Juno Beach, Florida-based company, said in a November
conference call with investors. NextEra’s wind expansion after
2012, when a federal tax credit for wind generators is expected
to expire, is contingent upon “public policy support,” said
Steve Stengel, a spokesman for NextEra, in a telephone
interview.
“Wind on its own without incentives is far from economic
unless gas is north of $6.50,” said Travis Miller, a Chicago-
based utility analyst at Morningstar Inc.

Shale Gas Boom

U.S. gas supplies have been growing since producers learned
how to use hydraulic fracturing and horizontal drilling to tap
deposits locked in dense shale rock formations. Gas prices have
been falling since mid-2008, when a global recession sapped
demand just as drilling accelerated in the gas-rich Marcellus
shale in the eastern U.S., according to data compiled by
Bg.
Gas prices collapsed further in late 2011 on concerns mild
winter weather in the U.S. will curb demand for the heating
fuel. Gas is expected to stay below 2011’s average price of
$4.026 for the next two years, priced at around $3.10 per
million British thermal units for 2012 and $4 for 2013,
according to Robert W. Baird & Co., an investment bank based in
Milwaukee.

New Gas Generation

Declining power prices may also make it unprofitable for
utilities to install pollution controls on older coal-fired
plants, adding to the wave of plant closures that are expected
to result from new U.S. Environmental Protection Agency rules
over the next two to three years, Pruitt said.
As much as 90 gigawatts of new generation, enough capacity
to light 72 million homes and businesses, will be needed by 2015
to replace retiring coal plants and meet electricity demand,
according to a Nov. 30 research report by Hugh Wynne, an analyst
at investment bank Sanford C. Bernstein.
Cheap gas makes it difficult for rival forms of fuel to
compete, said Sam Brothwell, a senior utility analyst with
Bg Industries, in a telephone interview. Historically,
gas-fired generators have been the least expensive to build,
offset by a higher fuel cost, Brothwell said. With gas falling
below $3, “it makes all other forms of producing electricity
look less competitive by comparison,” he said.

Gas Power Costs

The cost, including construction, to produce one megawatt
hour of gas-fueled electricity was $62.37 an hour in the third
quarter of 2011, which was less expensive than coal, wind and
solar generators, according to data compiled by Bg.
Power companies are leery of becoming too dependent on gas,
which historically has had the biggest price swings of all the
power fuels. In 2005, gas prices climbed to nearly $14 after
hurricanes disrupted production in the Gulf of Mexico.
Project cancellations, along with a broader switch from
coal to gas, will leave the industry with fewer alternatives and
thus more exposed to rising gas prices, Pruitt said.
“The way to make $4 gas $8 gas is for everyone to go out
and build combined-cycle natural-gas plants,” Michael Morris,
non-executive chairman of American Electric Power Inc., said at
an industry conference in November. “We need to be cautious
about how we go about this.”