There are dangers down the road in relying solely on naturalgas-fired electricity generation for both companies and consumers,according to Energy Security Analysis Inc. (ESAI) in its NaturalGas Power Alert released last week. The firm said the risk of notdiversifying a portfolio with coal-fired or oil-fired generationgreatly increases the exposure of a company or a state to thevolatile natural gas market.

With gas becoming the overwhelming fuel of choice to createelectricity due to its environmentally-friendly nature, it is nowonder that companies are building almost nothing else. However, byrelying on natural gas only, a state like California accepts theextremely high volatility associated with the market, ESAI said.The analyst firm also warns that gas-intensive companies such asCalpine stand to make huge gains overnight, but with the high-risknatural gas market attached, it also needs to be prepared toweather the severe bad times.

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

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

“In our view, there is no affordable regulatory remedy to thisproblem,” ESAI said. “Outside the energy area, managers havelearned how to cope with hyper-volatility and portfolioconcentrations. In the end, it is likely that the efforts ofhundreds of private risk management programs will come to a better,overall more efficient, solution than efforts to re-regulate.”

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