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Shale-Driven Low Gas Prices Reorder Power Sector

Shale-inspired historic low prices for natural gas are reconfiguring the electricity generation sector, particularly for renewable or clean power, according to Sacramento, CA-based consultant/independent power entrepreneur Mark Henwood. The market is beginning to notice what Henwood called "this rapid shift in natural gas economics."

"Shale is driving the street price of energy down to very low levels and it's happening pretty much nationally," Henwood said. "The all-in price for power, including capital costs and everything else, from a brand new combined-cycle gas-fired plant is a little more than 6 cents[/kWh], according to IAEA [International Atomic Energy Agency]. That is pretty cheap to build a new super-low emission power plant, and I think this is going to impact the whole country."

Natural gas was trading at year-end 2011 at $3.11/MMBtu, and, price forecasts continued their downward trend Tuesday on the first business day of the new year as energy analysts with Raymond James & Associates Inc. lowered their estimate by a quarter to $3.25/Mcf for 2012.

"This is a big deal," to Henwood, the director of New Energy View, who said he has seen two boom-bust cycles for renewables in his 30 years in the energy business. One of those notably included the development of small hydroelectric generation plants like the ones he now owns and operates in northern California under long-term contracts with Pacific Gas and Electric Co.

In both the previous periods, renewables were pushed to the forefront amid high fossil fuel prices, only to see the fossil fuel prices drop dramatically. "I'm seeing something similar here, except we're worried about global warming now, and we weren't in the past," he said.

One indicator of how low gas prices are impacting power, and particularly renewable projects, is seen in California's market price referent (MPR) used to determine the economic competitiveness of proposed clean energy projects and calculated on a methodology using a 12-trading day average of Nymex gas prices. In the past three years, the MPR calculated by the California Public Utilities Commission (CPUC) has dropped by more than 25%, Henwood said.

"If I looked at a 20-year deal that began in 2012, and if I had signed that contract in 2008 I would have gotten 12.1 cents/kWh; or if I signed it in 2009 when gas prices had already started to decline, I would have gotten 10.5 cents/kWh because the MPR went down 13%," Henwood said. "This year, the MPR was recalculated again and the new price was 9 cent/kWh, another 15% decline in the MPR."

The MPR is a benchmark comparison that affects a whole range of projects and tariff comparisons by the CPUC, he said. "We continue to see that referent number going down, and to the extent that solar projects are getting cheaper, maybe they can track down fast enough to still be viable, but certainly this is not encouraging more [renewable] projects as prices go down."

The new low price of gas "is not great news for the clean energy business, and I am in the clean energy business," said Henwood, noting that he has five hydroelectric plants in California, totaling about 3 MW. Four of those plants are locked into favorable long-term deals, but one needs to be renegotiated in the next two years, and that is expected to be at significantly lower gas prices.

In the current markets there "is no mistaking the shale connection" with all of the market shifts, whether it is increased gas-fired generation, a move to export U.S. gas as liquefied natural gas (LNG), or added natural gas use in transportation. The market dynamics of shale are already influencing investment decisions in coal plants that are being retired or the construction of new chemical processing plants.

In a recent online commentary, Henwood cited Royal Dutch Shell PLC's plans for an ethylene plant in the Appalachian region; Nucor building a gas-fired iron plant in Louisiana; Dow Chemical Co. talking about two new facilities in the Gulf of Mexico region; and CF Industries planning to expand its fertilizer production from gas.

The one possible bright spot for renewables is the prospect of large-scale U.S. LNG exports, Henwood believes. This could lead to a resurgence of renewable-based power if the exports tighten domestic markets and drive up gas prices.

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