Domestic natural gas prices are expected to remain tame over the next five years, but they are likely to become more volatile in the years beyond as the demand for gas by power generators rises, several energy experts said last Tuesday.
Although the gas market and prices were "relatively stable" in 2007, "this comfort level of supply relative to demand is going to begin to erode over the next five years or so" due to greater demand for natural gas from the power sector, said Joe Crespo, manager and senior analyst for North America Gas Research at Wood Mackenzie during the National Association of Regulatory Utility Commissioners' annual winter meetings in Washington, DC.
He noted that a number of uncertainties -- related to greenhouse gas (GHG) emissions legislation, the siting of coal-fired generation plants and rising capital costs for utilities -- will cause electric generators to favor natural gas as an input fuel, putting upward pressure on gas prices between 2013 and 2020. Crespo also sees utilities relying more on higher priced liquefied natural gas (LNG) imports and unconventional gas to fuel their facilities.
Utilities "are going to tend to favor natural gas development over coal development because of the high capital costs and uncertainty" associated with clean-coal technologies, he said. Natural gas is going to be the "fuel of choice" for power generators over the next decade, according to Crespo.
The preference for natural gas is already evident. More than half of the coal-fired generation projects announced since 2000 have either been canceled or postponed, he noted.
However, natural gas demand and prices could begin to dip in later years (after 2020) in the event more nuclear, clean-coal technologies and renewable fuels play an "important role" in the energy portfolio of power utilities, Crespo said. Interestingly, he noted that a recent study by Wood Mackenzie found that under a GHG-control scenario -- where clean-coal technologies, a cap-and-trade program for emissions, and more nuclear and renewable fuels would be available -- gas demand would be less than demand under its base case that didn't include federally mandated GHG legislation.
"And the reason for that is because that's the point where nuclear technology can start coming on line, and nuclear replaces coal much more than gas," Crespo said.
"I can't say I have a high degree of confidence" in the belief that clean-coal technologies will help cut gas demand by generators, said Ellen Lapson, managing director of the Global Power Group for Fitch Ratings. "I share the concern that [over] the next five years and the next 10 years we are actually going to see a continually constrained environment in which conventional supplies of natural gas are not being replaced as rapidly." The nation will become more dependent on unconventional gas supplies, which will demand higher prices, she noted.
"The road ahead [for gas prices] is going to be every bit as volatile," Lapson said. "We have [projected] a relatively easy price environment for natural gas in the current year...However, we expect a resumption of volatility a couple of years out," creating a potentially bleak financial outlook for utilities.
As a result, Fitch's near-term credit outlook for electric utilities is stable for now, but the two- to five-year outlook is negative, Lapson told state regulators and energy executives.
Under a pessimistic scenario in which the clean-coal alternatives are not available, the amount of natural gas presently used to produce electricity would have to grow by a factor of 2.8 to meet demand, said Revis James, director of the Energy Technology Assessment Center at the Electric Power Research Institute. Currently an estimated 27% of U.S. gas supply is available to generators to produce power, he noted.
Commissioner Don Mason of the Public Utilities Commission of Ohio said one of his chief concerns is that the electric sector will be competing against the homeowner for natural gas to heat their homes. Moreover, he said he fears that natural gas prices, which traditionally have been one-sixth the price of crude oil, could climb to as high as $16/Mcf if gas tracks the meteoric rise in oil prices. So far this has not happened.
William N. Cantrell, president of TECO Peoples Gas Systems, touted the direct use of natural gas by residential and commercial consumers, saying it delivers 90% energy efficiency to end-users as compared to 27% end-use efficiency when gas is used to generate electricity, and results in 40% less carbon dioxide (CO2) emissions than electricity production.
A study commissioned by the American Gas Foundation, which is due to be released in March, finds that a 50% shift of the switchable electric load to natural gas service would produce energy savings of 1.25-2 quadrillion Btu, avoided generation capacity of 63 to 80 gigawatts and avoided investment of $49 billion to $122 billion by 2030, according to Cantrell.
The study further contends that increased direct use of natural gas would reduce overall energy costs by $18 billion to $29 billion by 2030, and cut CO2 emissions by up to 200 million tons over the same period.
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