In a new report, titled “WECC Electricity & Fuel Price Outlook,” Sacramento, CA-based consulting firm Henwood Energy acknowledged having to raise its natural gas price forecast by 50 cents/MMBtu but said it still expects gas prices to come down from their current lofty levels in the long term to about $3.50-4.00.

Henwood does not believe that the current fundamentals fully support these high gas prices because gas storage levels are higher than the previous year and not far from historical averages. “However, a fear of returning to historically low gas storage levels and fear that prices will again spike if this happens appears to be driving buyers to pay high prices to avoid exposure to these events,” the group said.

“In the longer run, opening up new gas supply areas and permitting new liquefied natural gas (LNG) facilities are expected to drive natural gas prices back down…”

Merchant generator profitability in the West has been helped somewhat by high gas prices. “Higher gas prices should help merchant generators keeping natural gas-fired generation on the margin a large share of the time in the Western Electricity Coordinating Council (WECC),” Henwood said. “Gas price increases of $1/MMBtu increase market clearing spot prices by $10/MWh but will only increase costs for an efficient 7,000 Btu/kWh generator by $7/MWh. Therefore, the increase gas price of $1/MMBtu would increase the spark spread by $3/MWh. This is good news for merchant generators, but they are not out of the woods yet.”

The West has gone from tight power supply in 2000 to excess reserves with more generation being built than forecast six months ago, Henwood noted. “The additional plants are being built by municipal utilities that want to assure more reliable supply for themselves and feel reluctant to contract with non-creditworthy merchant plants. Several investor-owned utilities with recently completed resource plans decided to build rather than buy from merchant plants.”

While merchant power companies are seeing some relief from depressed wholesale electricity prices in the West, there is a very low probability of power shortages in the WECC or in California in the balance of this decade despite the concerns of the California Independent System Operator (CAISO), according to the Henwood report.

While there is some possibility that extreme temperature events coupled with higher than normal generation or transmission forced outages could result in temporary problems, there is very little chance California will experience a “power crisis” during the rest of this decade, the report said. Both Henwood and CAISO respectively show healthy reserve margins in California under normal peak hour days. The recent load curtailment and Stage One Alert in California were driven by dispatcher inaction rather than a lack of available supply, Henwood said.

Nevertheless, the power oversupply situation in the West is dissipating. A key turnaround indicator is a 2.5% increase in electric loads forecast across WECC reflecting a recovery from the load drop driven by the power crisis in WECC in the years 2000-2001.

Henwood said it has had to lower its projections for renewable power because of the energy bill not being approved by Congress and because of slower than expected permitting.

For more details from the Henwood report, go to Henwood Energy is a division of Global Energy Decisions, an international consulting firm for the electric power industry.

©Copyright 2004 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.