A financial community audience hosted by Standard & Poor’s in New York City was told last Wednesday that in the wake of this year’s energy industry credit and credibility crisis, electricity reserves look adequate for North America through 2008, but energy price volatility is expected to continue, particularly in regard to natural gas. On average, however, gas prices should stay in the $2.75-$3.50/MMBtu range, according to a presentation by Boulder, CO-based researcher Douglas Logan, a principal in Platts Research & Consulting/RDI.
Even with cancellations and retirements, there are 544,000 MW worth of active new generation projects spread across the U.S. and Canada, Logan told S&P’s Power and Energy Credit Conference. That includes about 77,000 MW under construction as of March that are scheduled to come on line in 2002, and what Logan calls “almost as much” coming on line in 2003.
“It is quite likely that some of those plants may slip back a year, but generally we see the bulk of the new development coming online this year and next — exceeding by far what came on line last year,” he said, adding the caveat that there still may be proposed projects “that have quietly faded away.”
With the surplus of reserves projected over the next five to six years, Logan anticipates that market prices will stay relatively stable, with occasional volatility in regions. Regardless of whether alleged and admitted market manipulations in the West contributed to wholesale prices spikes last year, Logan said a “strong shift in fundamentals can explain a lot of what happened in prices.”
Price spikes in California had been predicted several years ago for California at the same time surpluses were projected for other regions. “So whether or not there were market shenanigans affecting power prices, there were big things happening with fundamentals that were foreseeable, so we weren’t at all surprised by the general (spike-decline) trend on the West Coast,” Logan said.
“What is our long-term forecast for the future? We see sort of lackluster prices continuing for the next several years.” Even in California, he thinks there is enough new construction through the West to carry the nation’s largest state, which he thinks will continue to be “very heavily reliant on imports.”
In terms of natural gas, Logan’s analytical work doesn’t see a “sustained period” in the future for gas prices reaching the levels of the last two years. He envisions that those type of prices won’t return until closer to a decade out into the future.
“The fundamentals are in place for keeping gas prices low, although current gas prices are a little higher than this projection longer term,” Logan said.”Our view of the fundamentals is that the prices will stay low — mostly between $2.75 and $3.50/MMBtus.”
However, Logan admitted there could still be a lot of short-term spikes over time due to a number of uncertainties about domestic U.S. gas supplies. Electric generation growth and demand are two major uncertainties, and U.S. producers are “working hard just to replace production lost from natural decline,” he said.
He said the 30 Tcf national gas market goal between 2010 and 2015 hinges on the ability of the industry to simultaneously develop six different “frontier” sources: Gulf of Mexico deep water; Rocky Mountain coalbed methane; both Eastern and Western Canada; liquefied natural gas (LNG); and Mackenzie-Beaufort Basin and Northern Alaska. “The timing and economics of these incremental sources drives uncertainty in gas markets,” he said.
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