“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. (NEE), has shelved plans for new U.S. wind projects next year and Exelon Corp. (EXC) called off plans to expand two nuclear plants. Michigan utility CMS Energy Corp. (CMS) 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. (CEG), NRG Energy Inc. (NRG) and AES Corp. (AES), 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 Bloomberg.
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. (MORN)
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 Bloomberg.
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 (BADC) & 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 Bloomberg 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 Bloomberg.
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 (AEP) Inc., said at an industry conference in November. “We need to be cautious about how we go about this.”