Low Natural Gas Prices Hammer Power Prices
February 15 2012 - 7:30AM
Dow Jones News
Low U.S. natural gas prices have forced power prices lower,
changing the landscape for U.S. utilities and causing industry
insiders to worry whether there will be enough electricity to meet
demand as the economy recovers.
Natural gas prices have been falling since last summer amid a
production boom and relatively weak demand. But prices dropped to
10-year lows in January and have stayed there, as mild winter
weather has cut heating demand, creating a record surplus.
The low prices are good news for companies that sell power to
retail customers. But they're terrible for power-plant operators
who sell electricity on the wholesale market. While prices remain
low, power plant operators are focusing on sales to end-use
customers, which are more profitable. They're also putting plans
for new power plants on hold, which could lead to electricity
shortages in Texas and other regions in the next few years,
executives at power companies have warned.
"The supply being driven by the natural gas industry is sort of
driving the natural gas industry off a cliff and it's taking the
electrical industry with it," David Crane, chief executive of power
generator NRG Energy Inc. (NRG) said last week on the sidelines of
a conference in Washington.
New federal limits on emissions from power plants will cut power
supplies even further, as companies like American Electric Power
Co. (AEP) plan to shut down older coal-fired power plants over the
next few years, said Nick Akins, AEP's chief executive.
"If the economy comes back the way it was before, [and] at the
same time requirements are occurring relative to [federal]
requirements, that could further exacerbate the situation, you
could wind up with a very serious situation," Akins said Friday on
the sidelines of a meeting in New York.
Akins proposed that grid operators, like the PJM Interconnection
in the Mid-Atlantic, should consider offering incentives to
developers to build new power plants, and that federal regulators
should be flexible in implementing the environmental rules.
Natural gas futures in New York have been trading around $2.50 a
million British thermal units, reaching levels not seen since
February 2002. Electricity prices in the busy Mid-Atlantic region
have fallen by about a quarter from a year ago, to about $33.45 a
megawatt-hour for March power deliveries, according to Amerex
Brokers.
A unit of AES Corp. (AES) that owns four coal-fired power plants
in New York state filed for bankruptcy in January, blaming falling
power prices and high costs. Other companies, like Exelon Corp.
(EXC), are scaling back spending on their wholesale power plants
while they look for revenue and profit from their utilities and
other retail sales.
"The [profit] margin, if you go all the way to the retail
customer, is somewhat larger than it is just selling into the
wholesale market," Exelon Chief Executive John Rowe said last month
during a conference call with analysts.
Exelon plans to buy Constellation Energy Group Inc. (CEG) in a
deal valued at nearly $8 billion. Constellation owns a Baltimore
utility and a growing retail electricity business in the
Mid-Atlantic and Texas.
Meanwhile, analysts are predicting that natural gas prices will
remain low this year and next, as gas demand slowly catches up with
supply.
"We're having a tough time finding a home for all the supply,"
said Michael Zenker, an analyst at Barclays Capital. The bank
earlier this month cut its forecast for 2012 natural gas prices by
20% to $3.05 a million Btu and cut its 2013 gas price prediction by
14% to $3.70 a million Btu.
Some gas producers like Chesapeake Energy Corp. (CHK) have
announced plans to cut production. But Zenker and other analysts
are skeptical that it will be enough to boost prices.
After U.S. gas production in 2011 grew at a faster rate than
demand, production and demand are likely to grow at roughly the
same pace, about 2% in 2012 and roughly 1.5% in 2013, according to
a forecast this month by the U.S. Energy Information
Administration.
-By Cassandra Sweet and Ryan Tracy, Dow Jones Newswires;
415-439-6468; cassandra.sweet@dowjones.com
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