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Sunday, 20 May 2012 23:43

Will cheap natural gas go down in flames?

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WEST MICHIGAN — An abundance of cheap natural gas could drive down costs for customers and potentially change how utilities decide to generate power in the short term.

If natural gas prices remain low, companies in downtown Grand Rapids connected to Veolia Energy's district energy network can also expect to see a decrease in costs. The utility uses natural gas to produce steam and is regulated by the city to tie its rate structure to the market rate of the fuel.

"We pass all our savings through to the users," said Jim Monterusso, Veolia's general manager in Grand Rapids. "The price change doesn't really impact us, but it is a benefit to our customers."

Monterusso said demand was down because of the mild weather this winter, and the plant continued to run at a fraction of its capacity. The early warm spell in March had people turning their air conditioners on instead of their heaters.

With production at record highs and natural gas storage nearing full capacity thanks to weak demand from a warmer-than-normal winter, sources familiar with the market say they are bracing for an interesting time in the energy business. With hydraulic fracturing — known as fracking — opening up greater reserves of domestic natural gas, experts think the supply will continue to increase.

The price of natural gas may have rebounded slightly at the beginning of May, but even with a 4-percent price spike, natural gas is still coming off 10-year lows when prices dipped below $2 per million BTUs — or about half of where they were in June 2011.

Meanwhile, the price of coal has been on an upward trend. The U.S. Energy Information Administration (EIA) reported the delivered price of coal to utilities for electric power has "increased steadily over the last 10 years," jumping 5.8 percent in 2011 compared to 2010. The agency's outlook for 2012 is a 1.0 percent decline in coal prices on lower demand. The EIA also predicts coal production to decline by 7.6 percent in 2012 as domestic consumption and exports fall.

Coal's share of U.S. power generation was 42.2 percent in 2011, down from 44.8 percent in 2010. By comparison, the share of power generation from natural gas rose, from 24.0 percent in 2010 to 24.8 percent in 2011. In 2006, natural gas overtook nuclear as the second most popular energy source for power generation behind coal.

In Michigan, the EIA reported the average cost of natural gas for power generation fell 39.5 percent from February 2011 ($4.83 per million BTU) to February 2012 ($2.92 per million BTU).

The changing power generation dynamic has a couple of implications for West Michigan. Sources told MiBiz it will be interesting to watch how utilities react to the cheap natural gas this summer. The EIA forecast has coal and natural gas power generation costs just $0.79 apart per million BTUs.

Rather than keep baseload generation — which is mostly from coal — at a high level, industry insiders think the utilities might dial back on their baseload and use their natural gas-fired "peaker" plants more regularly because the cost of natural gas is competitive compared to coal. The "peaker" facilities are traditionally used only in periods of high demand, generally in the hottest part of summer days when air conditioning use is high.

The Holland Board of Public Works, for one, is currently running its natural gas-fired peaker and buying gas-generated power off the grid rather than operate its coal plants.

Dan Nally, business services director at the BPW, said the municipal utility generally runs the coal plant through the winter to operate the city's snow-melt system, but the mild weather and market conditions made buying off the grid more cost-effective at the end of March.

"We always compare all our options, whether it's purchased or self-generated. It's just the way we do business," Nally said. "We made decisions where we get that power based on the economics."

The current pricing situation is allowing the BPW to deliver "competitively priced power to our customers and keep our costs down," he said. "But I do not have a good feel for how long it's going to last. ... We're going to take advantage of it, but when the cost of production at the wellheads is roughly $4 per million BTU and they sell it at $2, it isn't sustainable. It's a market aberration, and one thing about markets is they always correct."

With electric rates set based on the utility's cost, Nally said BPW customers should continue to experience cheaper rates in the shortterm.

Veolia's Monterusso said the unpredictable pricing situation has affected the company's pursuit of building more distributed co-gen plants. Most companies are sitting on their cash, not wanting to make a significant investment in a power-generating facility at the wrong time. If it's difficult to predict costs several years out, companies are reluctant to make capital investments, he said.

"There is a lot of fuel in storage around the country right now, and the people producing don't shut off on a dime," Monterusso said. "If we don't change the supply and demand dynamics quickly, sometimes the presence of inventory will not do what we expect. When you push the system into an extreme, it can act like a lever. ...People think we could be in for even another major (natural gas) price decline this summer. It's hard to imagine it taking another leap down."

Some sources said low natural gas prices — coupled with the potential loss at the end of the year of a federal production tax credit for the wind industry — could severely inhibit renewable energy's chances at expansion. They said alternative energy projects, particularly those without government incentives or in areas lacking renewable portfolio mandates to drive the adoption of renewables, will struggle to gain financing and traction when natural gas — a cleaner-than-coal option — remains near 10-year low prices.

"Often the decision (to develop alternative energy) comes down to what are the feedstock economics going to be in five, 10 or 15 years and what risks are there," Monterusso said. "Because gas is historically cheap today, it's not making those decisions any easier. It does pose some challenges to some of the (energy) options out there."

Holland BPW's Nally said the price volatility is tough on utilities, which generally make decisions for generation capacity based on 40-year to 50-year timeframes. Utilities also have options in the RPS to own plants, contract for renewable generation or burn natural gas and buy a renewable energy credit (REC) off the market. The viability of each option changes based on the market for various fuels, including gas.

"Right now, buying gas and a REC is in the money more so than purchasing power from a renewable resource," Nally said. "But that's today. Most of the decisions utilities make are 40- to 50-year decisions."

The other influencing factor will be public acceptance of gas going forward, Nally said. If people turn on natural gas like they did with coal, then all bets could be off on the competitiveness of maintaining natural gas generation and buying a REC.

In fact, the Sierra Club has shifted its focus to natural gas with a new "Beyond Natural Gas" campaign, borrowing a page from its anti-coal messaging. The group aims to get the U.S. off fossil fuels by 2050.

Others see natural gas as a cleaner "bridge" fuel as the country weans itself off coal. Nally said he'd have to see some significant developments before he could see the nation giving up gas-fired baseload generation.

"They talk about it as a bridge fuel, but a bridge to what? Wind is intermittent. Solar is intermittent. There isn't that technology, renewable-wise, available to us today that we could shift into that we could use to serve the needs of the people in Holland. That bridge might be a bit longer than some people might hope," Nally said.

Read 1387 times Last modified on Thursday, 02 August 2012 17:10

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