Texas
Liquefied Natural Gas to Begin Shipping in 2015
Sabine Liquefaction, a subsidary of Cheniere Energy Partners, L.P, has entered into a liqufied natural gas (LNG) sale and purchase agreement with their sixth customer, Centrica. Centrica serves over 11 million households in Britain. The agreement allows Centrica to purchase 91,250,000 MMBtu of LNG volumes per year for twenty years.
Sabine Liquefaction is developing six liquefaction trains and has already begun construction on the first two. They expect to start construction on the third and fourth trains in the first half of 2013 and the permitting process and preliminary engineering have been initiated for the fifth and sixth trains. After all six trains are completed, the Sabine Pass will be able to ship out approximately 4 billion cubic feet of gas per day.
A liquefaction train is what an LNG plant uses to compress natural gas into a liquefied state. The gas is first refined to remove any impurities and is then cooled down to approximately -160 degrees celcius for shipping.
Cheniere isn’t the only US company to have signed long-term agreements with major LNG buyers and recent indications point to several more long-term contracts being announced in the near future. What was just a possibility last year has become a reality in 2013.
As natural gas becomes a world commodity, supply will decrease for the United States as demand increases in places like China and Japan where costs are significantly higher. This could provide upward pressure on domestic gas rates and 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.
Below is a snapshot of current global natural gas prices. Courtesy of FERC.
Panama Canal Expansion Will Help Provide a World Market for US Natural Gas
For nearly 100 years, the Panama Canal has provided a faster and safer path for goods to be shipped between Asia and North America. However, with ships growing wider and deeper to carry more goods per trip, the Canal has been forced to expand. Six years ago, Panama started a $5.25 Billion dollar expansion so that vessels up to three times larger can carry goods along the 48-mile route.
Meanwhile in the United States, technological advances in the drilling industry have allowed us to tap into some of the largest natural gas reserves in the world. Though natural gas prices in the United States have steadily declined since 2008, global demand and global prices are rising. Previously a local commodity, natural gas is now being transformed into a liquid state, becoming Liquefied Natural Gas (LNG), making it easier to be shipped overseas and sold at higher prices. Therefore, shale gas in the US combined with an expanded Panama Canal provides an opportunity for natural gas to enter the global marketplace. This could mean pricing mirroring the oil market, thus eliminating the current low price advantage of the domestic stock.
Jorge Luis Quijano, the Panama Canal Administrator, promises that the expanded passage through Panama will create new markets to exploit bigger ships and deeper ports (Washington Post). The new locks will help accommodate another 2,600 ships, oil tankers and LNG carries. Previously, only 10% of the world’s 369 LNG-carrying vessels could pass the canal. However, the expansion will accommodate up to 80% of the fleet. Expected completion is June 2015.
For more information on the opportunities the expansion can bring please visit this link.
Two cargo ships entering Panama Canal’s Gatun Locks. Ships are raised up to 87 feet to pass through the different lanes of the canal. Image courtesy of PRWeb.
Read MoreTransmission Cost Recovery Factor Charge Increase
The Transmission Cost Recovery Factor or TCRF is a charge found on electricity customer’s bills in the Oncor territory. Customers may notice that this charge fluctuates around 2 times a year. Depending on your meter’s rate class, the charge is calculated per kWh or per kW. Larger customers will always find their charge is based per kW. Click for detailed information on the TCRF.
In an open meeting with Oncor, approximate cost increases were detailed for the charge. In addition to the normal twice-a-year updates, the charge is expected to increase 2/10 of a penny per kWh by the end of 2013 and an additional 2/10 of a penny per kWh by the end of 2014. That totals nearly half a penny increase per kWh beginning 2015.
Below are example calculations from a customer with 363 kW demand and 112,800 kWh usage:
Total Current TCRF Charge: $756.70, which comes out to be around $.0067/kWh
With the 2/10 penny increase by the end of 2013, the total TCRF Charge would be: $981.36, which comes out to $0.0087/kWh
With the 2/10 penny increase by the end of 2014, the total TCRF Charge would be: $1,206.96, which comes out to $0.0107/kWh
The total overall increase from now until 2015 is $449.26 or a 37% increase for the particular example above. Exact percentages will depend on your load particulars.
Read MoreTransportation Charges with Atmos Increasing
If you’re a transportation customer with Atmos, you may have noticed an increase on your latest bill. The monthly charge has increased from $450 to $600. While the customer charge has increased, the cost per MMBtu has decreased:
2012 2013
First 1,500 $0.2750 $0.2473
Next 3,500 $0.2015 $0.1812
All Additional $0.0433 $0.0389
If you use from 1 to 1,500 MMBtu each month, you will see a cost increase anywhere from 13% to 33% on your total bill.
If you use from 1,501 to 5,000 MMBtu each month, you will see a cost increase anywhere from 2% to 13%.
If you use 5,001 MMBtu and above, you will see a cost increase of approximately 2%. It is not until a customer uses 14,000 MMBtu per month that a cost decrease will be seen. See the below for a further breakdown:
10,000 MMBtu per Month: 1% increase
12,000 MMBtu per Month: No change
14,000 MMBtu per Month: 0.1% decrease
15,000 MMBtu per Month: 0.3% decrease
If you would like to see what your approximate charges will look like in 2013, contact RPM today for an estimation using your company’s historical usage from the past year.
Read MoreSome 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 MoreCoal 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.
Click here to read the entire ruling.
Read MorePUCT 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.
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 MoreTexas 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.
Reserve Margins
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
Market Caps
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 MoreNatural 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.
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