All gassed up with nowhere to go?
All gassed up with nowhere to go?
How the integrated gas and power markets can keep from getting blindsided
If I were to have told you five years ago that natural gas prices at Dominion South Point would have a monthly average of $1 for most of 2015, what would you have said? How about that Texas Easter M3 would average under $2 from April through December 2015?
In the past year we have seen consistently low gas prices with no indication that prices will significantly rise any time soon. This should be considered great news for consumers. By all accounts the gas fired generation operators should enjoy low fuel costs for quite some time. Unfortunately there are no guarantees in such a dynamic industry as this one.
The problem is that simple supply and demand economics does not give you the whole answer. One needs to be able to look into the details of the economics. Who is really taking advantage of the low gas prices? How long will low cost gas last? Is the current infrastructure sufficient enough to meet present and future needs? What other factors will influence the industry? These are questions that need to be addressed in order to fully understand the implications of the increasingly integrated gas and power market.
Adding to the list of unknowns, in August 2015 the Environmental Protection Agency (EPA) issued new rules that will reduce carbon emissions from power plants under the Clean Power Plan (CPP). The plan establishes targets for each state to reduce carbon emissions from power plants, which would ultimately reduce the national electricity sectors emissions by just over 30% of the 2005 levels by 2030.
With the implementation of the CPP the burden for solving the emissions issues falls on each state, which in effect means the power producers in that state. Now if each of those operators already runs highly efficient gas fired generation plants and has access to the low gas prices available, the implementation might be very smooth. In reality the power industry in every state is going to have a great challenge meeting those targets.
According to the Institute for Energy Research (IER) more than 72 gigawatts of generating capacity has been or is now set to retire due to the new EPA regulations. That is enough electrical generation capacity to reliably power 44.7 million homes. In other words enough to power every home in every state west of the Mississippi River. Over 94 percent of these retirements will come from retiring coal-fired power plants, shutting down one-fifth of the U.S.’s coal-fired generating capacity. According to a Bloomberg Business report on April 13, 2015, the U.S. has approximately 300 gigawatts of coal-burning power capacity making up about 30 percent of the national total. If these plants continue to be retired, can natural gas plants pick up the slack of that reduction in generation capacity?
One proposed solution to reducing carbon emissions is to convert existing coal fired plants to natural gas fired plants. This idea may be a viable solution, but has its own barriers to consider. Is there enough existing infrastructure in place to bring gas to the newly converted plants? What would the cost be to build any new gas infrastructure? In an environment where new pipeline infrastructure is opposed, would the new infrastructure be approved?
Even without the new EPA rules effectively accelerating the closures and conversions of coal-burning plants, the need for new gas pipeline infrastructure has been growing. Bottlenecks in the northeast have led to price spiking during winter months because abundant gas although available cannot move to where it is needed to handle peaking winter demand.
The dilemmas faced by the power industry have created an environment similar to that of driving half blind through a foggy country road. You can possibly make out the shape of what’s coming, but cannot be fully sure until it is right in front of you. This is where sound fundamentals-based modeling can make the difference between driving half blind or moving forward with confidence that one can plan for and react to any condition met along the road.
By using advanced modeling tools to simulate these various scenarios within the existing and likely future infrastructure, one can identify potential choke points to supply and forecast how demand will change over time creating more or less competition for that gas. One can also get a sense for how long they can expect gas price levels to stay low by taking into consideration the effect of these prices on future production. These are all important factors in developing sound strategy for the integrated gas and power market going forward.
James Brooks, Director, RBAC Inc.
RBAC has been the leader in building fundamentals based modeling tools used by the energy industry and related government agencies for nearly two decades. The GPCM Natural Gas Market Forecasting System? is the most widely used tool of its kind in its markets. RBAC also produces models for daily gas (GPCM Daily?), NGL’s (NGL-NA?) and global gas (G2M2?) as well as tools for integrating our gas models with leading power market models. Please visit our website at https://www.rbac.com for more information.