Consumers could save billions on their electric bills if utilities used more long-term contracts, rather than spot market purchases, for natural gas for power generation, according to the American Clean Skies Foundation (ACSF), a nonprofit natural gas advocacy group.
In its 50-page report, “Power Switch: A No Regrets Guide to Expanding Natural Gas-Fired Electricity Generation,” CEO Gregory Staple and researchers Patrick Bean and Geoff Bromaghim said utilities, gas suppliers and regulators should cooperate and lock in rates at today’s low natural gas prices because they are expected to climb by the mid-2010s.
“The once-in-a-decade opportunity we see for electricity generators to secure affordable gas over the mid- to longer term is similar to the historic opportunity that homeowners and businesses now have to refinance mortgages at today’s record low interest rates,” Staple said. “The prudent use of some longer-term gas supply agreements can reduce risks for gas suppliers, electricity generators and customers alike. That’s why our report is called a ‘no regrets’ guide.”
Under ACSF’s plan, gas suppliers and power generators would both benefit if a new set of long-term gas purchase agreements and associated hedging arrangements were established. The agreements would be designed to share the risk of future price changes between them.
“A fresh approach that holds promise for achieving this result is to create a hybrid agreement that involves both fixed and market prices,” the report said. “For example, buyers and sellers can agree on a fixed price for a portion of the fuel supply with the remaining portion priced at market.
“Ultimately, a hybrid contract that blends fixed and market prices offers a risk-sharing mechanism that should be attractive to electric generators and gas suppliers alike. In contrast, fixed-price agreements may be too rigid, and price collars may not provide generators with adequate protection from volatility.”
ACSF also called for state regulators to support long-term gas purchase agreements through a three-step process: developing procedures for competitive procurement, reconsidering the practice of pre-approving standard fuel-cost pass-through arrangements, and expediting the regulatory review process.
“We believe that to best serve ratepayer interests, public utility commissions should work with utilities to create a transparent and competitive process for purchasing natural gas through long-term agreements,” the report said. “Colorado and Oklahoma have pioneered new public interest rules for this purpose that can serve as models for other states.”
The group cited the Colorado Clean Air-Jobs Act, which former Gov. Bill Ritter signed into law in April 2010 (see Daily GPI, April 20, 2010). The law required the state’s largest investor-owned utility, Xcel Energy, to replace 900 MW of coal-fired capacity with natural gas and alternative fuels.
ACSF also lauded the Oklahoma Corporation Commission (OCC) for approving a new competitive procurement rule in April 2012. The new rule allowed utilities to secure natural gas and other fuels through long-term contracts — two to more than five years — and also made changes to existing request for proposal procedures.
“The developments in Colorado and Oklahoma can serve as models for other states, and ultimately help lay the groundwork for more long-term gas deals that reduce ratepayer risks,” the report’s authors said. “With a foundation of regulatory acceptance, gas suppliers and electricity generators can develop simple, innovative, and mutually beneficial agreements.”
ACSF said data from the Energy Information Administration (EIA) showed that the domestic electricity sector would spend $330 billion for natural gas between 2013 and 2020. The nonprofit asserted that if 25% of that amount were financed through long-term contracts based on today’s low prices, consumers could save $16 billion for every $1 per MMBtu the contracts are below average spot prices.
Despite those savings, the nonprofit stressed that it was not trying to push utilities toward a sole reliance on long-term contracts to procure all of the natural gas they need.
“We do not recommend that generators rely solely on long-term agreements for their gas requirements,” the report said. “Nor should gas suppliers sell gas solely in this manner. Instead, we believe generators and natural gas producers should supplement their current strategies with long-term agreements as a way to reduce costs and risks while increasing resource diversity and supply certainty.”
Earlier this month, ACSF launched an advertising campaign using former presidents from both political parties and a clip from President Obama’s State of the Union address to promote natural gas use (see Daily GPI, June 1).
Chesapeake Energy Corp. is the nonprofit’s main financial supporter.
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