With the drought that plagued the northwest region of the country for most of 2001 appearing to be over, the resulting increase in hydropower will likely not put natural gas-fired generation out of business, according to Raymond James & Associates Inc. in its Stat of the Week. Raymond James analyst J. Marshall Adkins said the negative impact on gas-fired electricity generation from the increase in hydropower will be mostly offset by a reduction in nuclear power generation in 2002.

“Fortunately for the gas markets, the negative impact from higher hydro should be more than offset by reduced nuclear-generated electric power over the next year,” Adkins said in the brief. “This means that the net impact from the United States’ two largest non-hydrocarbon electric generation sources is likely to be only slightly negative for natural gas demand over the next year.”

During 2001, U.S. hydroelectric production was “drastically reduced” by a drought in the Pacific Northwest, which forced western U.S. electricity prices higher and put more of an emphasis on gas-fired generation to take up the slack. However, Adkins said the hydroelectric situation should reverse itself. The analyst said he expects hydroelectric generation to be up on an average of 4,600 MW through 2002, resulting in a natural gas demand decline in the region of about 1.3 Bcf/d.

Despite the return of hydroelectric power, Adkins said nuclear power — which saw “huge year-over-year increases” during the first three quarters of 2001 as a result of shorter refueling outages and stronger capacity utilization — should also reverse in 2002. Raymond James said nuclear power posted 2,600 MW in year-over-year increases in 2001, reducing gas-fired electric demand by an average of 0.6 Bcf/d.

“Previously, we had expected nuclear production to take a downturn beginning in May of 2002; however, the combination of September 11’s effect on nuclear security measures and mild weather…caused nuclear to turn down in November 2001,” Adkins said. “Additional security measures and weak demand have also caused nuclear plants to schedule even lower nuclear production than originally expected throughout 2002.”

The analyst said the reduction in nuclear output should increase natural gas demand for electricity generation by 1 Bcf/d. The net result of the increased hydropower and decreased nuclear generation is expected to result in only a 686 MW non-hydrocarbon electricity increase in 2002 over 2001. If nuclear plants keep to their planned shutdown schedule and precipitation remains as predicted, Adkins said the end result would be a less than one-tenth of a Bcf/d reduction in natural gas demand.

If this proves true, the analyst said, “we can return to our original thesis of lower gas supply, improving industrial demand, increased fuel switching to natural gas and an improvement in the economy as the reasoning behind a gas rebound in 2002.”

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