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ESAI Warns of Dependence on Natural Gas

ESAI Warns of Dependence on Natural Gas

There are dangers down the road in relying solely on natural gas-fired electricity generation for both companies and consumers, according to Energy Security Analysis Inc. (ESAI) in its Natural Gas Power Alert released last week. The firm said the risk of not diversifying a portfolio with coal-fired or oil-fired generation greatly increases the exposure of a company or a state to the volatile natural gas market.

With gas becoming the overwhelming fuel of choice to create electricity due to its environmentally-friendly nature, it is no wonder that companies are building almost nothing else. However, by relying on natural gas only, a state like California accepts the extremely high volatility associated with the market, ESAI said. The analyst firm also warns that gas-intensive companies such as Calpine stand to make huge gains overnight, but with the high-risk natural gas market attached, it also needs to be prepared to weather the severe bad times.

The company predicts that in years when the United States as a whole has cold winters followed by hot summers, the national gas prices will average $6/MMBtu, and in years that warm winters are followed by cool summers, the national gas price will average $2/MMBtu.

Likening the natural gas-fired electricity generation craze to the peak of the dot-com era on the NASDAQ market of 2000, ESAI said that developers, suppliers and financiers are standing in line to bring new gas-fired generation to life. On the other hand, it said that consumers are suffering with extraordinarily high gas bills and are asking regulators and politicians for some kind of relief.

"In our view, there is no affordable regulatory remedy to this problem," ESAI said. "Outside the energy area, managers have learned how to cope with hyper-volatility and portfolio concentrations. In the end, it is likely that the efforts of hundreds of private risk management programs will come to a better, overall more efficient, solution than efforts to re-regulate."

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