Excessive Natural Gas Supply Spurring Innovation in the US
Total overall energy production in the United States is expected to surpass Saudi Arabia by 2020 due to America’s vast natural gas resources. With the surplus supply comes an emergence of new innovations. As new uses for the excessive and inexpensive supply become operational, the result will be upward price pressure on natural gas and, in turn, electricity.
The boom in shale drilling has significantly reduced the cost of natural gas in the United States and has encouraged many energy/chemical companies, like Sasol & Cheniere Energy, to build plants.
On December 3, 2012, Sasol, a South African energy company, made an announcement that it plans to build a fuel plant in Louisiana with ability to convert natural gas into diesel and jet fuel, as well as other products.
The plant will be similar to smaller plants located in South Africa and Qatar and cost anywhere from 11 to 14 billion dollars to build. Designed to produce 96,000 barrels of fuel a day using gas-to-liquids (G.T.L.) technology, this facility will be the first of its kind in America.
The photograph above is one of Sasol’s gas-to-liquids facilities. Courtesy of EnergeticCity.
David Constable, Chief Executive with Sasol, explained that adding the exclusive G.T.L. technology in the United States’ energy mix will advance the country’s energy independence. More information on the Sasol plant announcement can be found at: http://goo.gl/kVYbQ.
While the Sasol plant’s success depends on natural gas prices remaining lower than other fuel sources, Cheniere Energy’s exporting plant should succeed depending on overseas natural gas demand.
Recently, natural gas drilling has slowed due to the decrease in prices. However, plans for the US to begin exporting the fuel to Asian countries, where natural gas trades three-to-four times American prices, could encourage drilling to rise again. With natural gas eventually being sold on the global market to the highest bidder, it should provide upward pressure on domestic gas rates. Once natural gas prices reach $4.50 – $5.00, coal and other fuel sources can become attractive electricity generation options again – potentially causing electricity rates to rise.
The U.S. Energy Department is considering approving 15 more liquefied natural gas (LNG) terminals with a total export capacity of 26.5 billion cubic feet a day.
Overall, in an analysis performed by NERA Economic Consulting at the request of the U.S. Energy Department, the benefits of exporting natural gas far outweigh the concerns. Exporting has the potential to bring in near $32 billion in annual revenue and thousands of new American jobs.
Exporting almost one-third of the total US consumption and converting a portion of the rest to liquid fuel will change natural gas prices and our total energy portfolio forever. How much will this effect the energy cost to the end user? That remains to be seen.Read More
Some Good News for the Lack of Generation in Texas
Panda Power Funds, an organization built to develop and invest in natural gas power generation and solar energy projects, announced Tuesday, September 18 it would immediately begin building a power plant in Sherman, Texas. The 758-megawatt (MW) plant will be fueled by natural gas.
Panda began construction of a similar 1,000 MW plant in Temple, Texas in July. Bill Pentak, spokesman for Panda, says both plants will be producing electricity by the end of 2014 and once operational, the Sherman power plant will supply power to the needs of about 750,000 homes.
The Texas Electric Reliability Council of Texas (ERCOT) continuously warns that Texas will face electricity shortages unless new generating plants are built or consumers cut back on usage. The announcement of these plants comes at a good time for the ERCOT grid, which faces declining reserve margins each day.
The Texas Public Utility Commission (PUCT) voted to increase the system wide offer cap in June from $3,000 to $4,500 per megawatt hour (MWH). In lay perspective, that equates to $4.50 per kilowatt hour (kWh) during high peak demand periods. Further increases to the price cap are pending with the anticipated goal of spurring investment into new generation facilities.
More generation would lead to an increased reserve margin and fewer struggles to meet demand during extreme weather situations coupled with Texas’s continuous population growth. However, increases to the price cap will also mean higher prices for consumers.
Please see the chart below for the coming years’ forecasted reserve margin (courtesy of ERCOT).
The red dashed line represents the ERCOT grid’s projected reserve margin over the next 10 years. Note that near the middle of 2014, the reserve margin will not be met and after 2015, the margin steadily decreases again.Read More
Coal plants in Texas, U.S. no longer under pressure to comply with strict EPA standards
The U.S. court of Appeals overturned the Environmental Protection Agency’s cross-state air pollution rule (CSAPR). This standard would have required 23 states, including Texas, to decrease sulfur dioxide and nitrogen oxide emissions.
Judge Brett Kavanaugh’s justification for ruling against the standard states:
EPA has used the good neighbor provision to impose massive emissions reduction requirements on upwind States without regard to the limits imposed by the statutory text. Whatever its merits as a policy matter, EPA’s Transport Rule violates the statute. Second, the Clean Air Act affords States the initial opportunity to implement reductions required by EPA under the good neighbor provision. But here, when EPA quantified States’ good neighbor obligations, it did not allow the States the initial opportunity to implement the required reductions with respect to sources within their borders. Instead, EPA quantified States’ good neighbor obligations and simultaneously set forth EPA-designed Federal Implementation Plans, or FIPs, to implement those obligations at the State level. By doing so, EPA departed from its consistent prior approach to implementing the good neighbor provision and violated the Act.
This is a victory for coal plants across Texas and the United States – most will avoid shut down and/or installation of pricey equipment to comply with the EPA’s rules. As you can see in the chart above, almost half of US electricity needs are fueled by coal-fired power plants.Read More
PUCT Raises System-Wide Offer Cap to $4,500/mWh, Immediately Affecting Electricity Prices
The Public Utility Commission announced it’s decision to raise the system-wide offer cap to from $3,000 to $4,500/mWh today. Although not effective until August 1, this ruling immediately affected electricity prices. Prices have shot up and any unsigned contracts are being pulled.
What does this mean for the consumer?
Index Consumers – Even though prices spike up to the cap only a few hours each year, consumers riding an index will be most affected by this cap increase due to price risk exposure. It is suggested at this time that a customer with an index-priced product convert to a fixed-price product.
Fixed Price Consumer – There is speculation around whether or not a retail electric provider (REP) can pass through any cost increases associated with the rate cap by means of the “Change in Law” provision in contracts. Due to each REP’s unique way of hedging, amounts passed through would vary – especially if a REP doesn’t hedge fixed-price contracts appropriately or even at all.
Background on the PUCT’s Decision to Raise Market Caps:
Discussions on raising the cap began when the Electric Reliability Council of Texas (ERCOT) announced decreasing reserve margins. A reserve margin is the amount of available power above the capacity needed to meet normal peak demand levels. ERCOT’s target reserve margin, used to ensure stable grid operation, is set at 13.75% and actual reserve margins are likely to fall below the target by 2014.
The anticipated goal for the cap rate increase is to spur construction of new generation facilities. More generation would lead to an increased reserve margin, resulting in fewer struggles to meet demand during extreme weather situations coupled with Texas’s continuous population growth.
Not only has the PUCT passed the cap increase to $4,500 – They have launched another proposal to set cap rates in future years: $5,000/mWh before summer 2013; $7,000/mWh in 2014; and $9,000/mWh in 2015.
We will keep you updated on any future increases.
California’s Cap and Trade Program Launching January 1
The California Air Resources Board (CARB) is in the end stages of assembling a greenhouse gas cap and trade program. The program officially launches on January 1, 2013 and will cover major sources of greenhouse gas emissions in the State.
The goal of this program is to fight climate change and reduce greenhouse gas emissions to 1990 levels by the year 2020 eventually achieving an 80% reduction from the 1990 level s by 2050.
California, the first and only state to have created a cap and trade system, has now been joined by Quebec.
“Linking with Quebec is a significant advance in California’s efforts to fight climate change and steer our economy toward a clean energy future,” stated Mary Nichols, chairwoman of the CARB.
CARB is developing California’s carbon market and is scheduled to vote on rules this month. If approved, the first linked auction for Quebec and California companies will take place in November.
Cap and Trade Explained
Emissions caps are established by collecting emissions data from large industries. Business are then grouped and assigned an average emissions benchmark. Businesses are allowed to emit 90% of the benchmark in the first year and companies that operate below the cap may sell their excess allowance on the ‘market’. Companies with emissions above the benchmark may purchase these credits.
The cap and trade is a great way to reward companies for reducing their greenhouse gas emissions but will hurt those using fossil fuels, especially those using coal – the dirtiest fuel. The ultimate goal of the program is to eliminate the reliance on any fossil fuels for energy and incent renewable energy growth.
Obama proposed a nationwide cap and trade program in 2009 which didn’t pass. West Virginia and Indiana– states using coal for more than 90% of electricity generation – are safe from any adjustments for now.
Assuming a nationwide program is eventually put in place, any region heavily relying on fossil fuels for their electricity needs will absolutely see an increase in their electricity prices. To comply, plants will need to purchase emissions credits – costs which would be passed on to the consumers.
Decommissioning fossil fuel-fired power plants and preventing any new construction may be the best way to reduce the nation’s carbon footprint, but will definitely affect the end users. Picture courtesy of Legal Planet (legalplanet.wordpress.com)
WHOLESALE HEAT RATES PULL BACK ON ANNOUNCEMENT OF A MILD SUMMER; AFFECTING ELECTRICITY RATES IN TEXAS
The main culprit behind any recent electricity price increase is a wholesale term called “heat rates.” Heat rates are used in the energy industry to determine how efficiently a generator uses heat energy. Generally, natural gas prices and heat rates have an inverse relationship. If natural gas goes up, heat rates go down and vice versa.
The Cost of Electricity = Natural Gas x Heat Rate
Last summer gas prices were around $4 and electricity was around $50/mWh (5 cents/kWh). This means heat rates were at about $12.50. Although gas prices remained steady, during the 4 days in August when demand and threats for blackouts were high, the heat rate was about $91.25; making electricity about 36.5 cents a kWh.
Natural gas prices have stayed relatively stable and are expected to stay that way. However, heat rates began increasing due to tighter reserve margins and the price of electricity was reflecting this fact (Read More). Electricity prices were running a few mils (1 mil – $0.001) higher per kWh in March, April and early May. Refer to the chart below to see the price climb beginning in March and the pullback in mid-May.
Above chart courtesy of MP2 Energy.
Due to mild weather forecasts for this summer, we have seen a pullback in heat rate prices which is bringing electricity prices back down. Also attributing to this price decrease is the announcement of a 500MW generation expansion coming online as soon as next summer. Now is a good time to lock in any electricity contracts before heat rates begin climbing back up on tight reserves or extreme weather.Read More
Japan Possibly Importing LNG From Continental US
Due to last year’s tsunami effects on Japans nuclear fleet, the country now heavily relies on liquefied natural gas (LNG) for their power needs. The fracking revolution has flooded the US natural gas market – prompting many producers to consider export projects.
Japan is currently in talks with Sempra Energy’s LNG project in Cameron, Louisiana; Dominion Resources’ LNG project in Cove Point, Maryland; and Freeport LNG in Texas to buy a combined 30 million metric tons of LNG a year. More information can be found here.
Gas prices in Asia are about seven times higher than US prices, making the export to Japan a profitable opportunity for US natural gas corporations. Like any commodity, exporting from the US decreases the supply and increases the demand causing prices to potentially increase.Read More
Texas Electricity Prices Rise Due to Market Capacity Charges and Shrinking Reserve Margins
Despite 10 year low natural gas prices, why are ERCOT electricity rates now rising?
Wholesale power prices follow natural gas prices, especially in Texas where about half of power plants are powered by this fuel. A compilation of several factors including tight reserve margins and an increased market cap are adversely affecting electricity prices.
Rates have increased by $0.002 to $0.004 per kilowatt hour (kWh) on new retail electric contracts. For a customer with an annual usage of 1 million kWh, this equates to $2,000 to $4,000 in extra costs per year.
Additionally, the population in Texas is increasing by nearly 200,000 people each year and no new generation has been constructed nor have any plans for new generation been submitted. This means Texas’ electricity needs are spread even thinner to accommodate not only the rising population, but the extreme demand in severe winter or summer months.
A reserve margin refers to the amount of available power capacity above the capacity needed to meet normal peak demand levels. ERCOT’s target reserve margin, used to ensure stable grid operation, is set at 13.75%. The forecasted reserve margin for summer 2012 is slightly above that at 13.99%.
Last year’s reserve margins were at 17.5% and still, in February and August 2011, the grid not only failed to meet demand but also set a new winter peak demand record and three all-time summer peak demand records in 4 days. Read More: ERCOT News Release
The lack of generation has led the Public Utility Commission of Texas to come up with a potential solution: raising the market cap. A market cap is the maximum cost a generator can charge for electricity per megawatt. The cap is important during peak demand times and electricity generators rely on these peaks to make a profit.
Wholesale prices of electricity are currently around $40 per megawatt. In August of last year, when record-high temperatures plagued Texas, wholesale prices spiked to the current cap of $3,000 per megawatt or $3.00 per kWh.
The PUC is pushing to increase the cap to $4,500 this summer and potentially up to $7,500 in the next several years. Raising the cap will hopefully bring in new generation by providing a financial incentive to investors. Rather than earning $3,000 per megawatt during peak demand, they will earn a minimum of 1.5 times more than the current cap.
We will keep you updated on any further information regarding the market cap and or reserve margins.Read More
Natural Gas Gluttony Causing One Major Producer to Reduce Drilling Operations
Chesapeake Energy Corporation (NYSE: CHK), the second largest producer of natural gas in the United States, is making vast changes in order to protect their shareholders. Natural gas prices have hit a ten year low causing Chesapeake to decrease drilling in the Barnett, Haynesville and Marcellus Shale Plays. The company is immediately curtailing gross gas production by up to .5 billion cubic feet (Bcf) per day. If prices remain low, the company is willing to increase the curtailment to 1 Bcf a day.
An abundance of shale gas plays (see above image) has led to a surplus in natural gas inventories. Coupled with the mild winter the US has seen, natural gas prices steadily declined. After Chesapeake’s announcement, the market closed up $0.182 to $2.525. Pundits still feel that to have a real impact, other producers such as Exxon, EnCana and Devon Energy will have to follow suit.
Please visit http://rapidpower.net/rpm-market-news to see a real time update on 12, 24 and 36 month natural gas futures prices.Read More
EPA’s CSAPR Delayed
The EPA Cross State Air Pollution Rule finalized in July 2011 has been delayed pending further review. The US District Court of Appeals granted a request from several power generators who stated the January 1, 2012 implementation date was too soon.
The Federal Electric Regulatory Council (FERC) is also concerned with the impact that the rule would have in places like Texas and the New England States where demand is high.
The court is asking that oral arguments regarding this matter take place by April 2012.
As RPM clients, we will continue to keep you informed on this critical piece of legislation.
Previous Articles Regarding the CSAPR:Read More