Will low natural gas prices lead to natural-gas fired plants

June 16, 2009 by Kristin Schrader Marcell · 1 Comment
Filed under: Natural Gas, energy

Yesterday the Wall Street Journal ran a story about how new supplies of natural gas, combined with reduced demand for electricity, have decreased natural gas prices to less than $4 per million British thermal units, which some say could prompt power companies to invest billions of dollars in natural-gas fired plants.

Specifically in the article “Lower Natural-Gas Price Leaves Coal Out in Cold,” Rebecca Smith and Ben Casselman reported that coal now accounts for about half of the nation’s electricity, compared with about 21 percent from natural gas. However, they stated that “natural-gas plants can be built more quickly and inexpensively than coal plants, and they release about half as much carbon dioxide as coal to produce similar amounts of electricity. That could be a big advantage if Congress passes a climate-change bill that would cap such carbon emissions.”

Natural-gas plants can be built more quickly and inexpensively than coal plants, and they release about half as much carbon dioxide as coal to produce similar amounts of electricity.

Additionally, new natural-gas discoveries in Texas, Louisiana, Pennsylvania and elsewhere, have created a large natural gas supply abundance that has changed the view of U.S. gas supplies and fuel outlooks for the near future. In fact, according to a research report released June 1, 2009 by Merrill Lynch & Co, ‘in parts of the U.S. where there are daily electricity auctions, gas generators are chipping away at coal market share with lower prices. Coal-to-gas switching has created incremental gas demand of three billion cubic feet a day, and ‘further switching potential is still large, in our view.’”

This article is very timely since the American Gas Association and the Potential Gas Committee are hosting a press conference this Thursday, June 18, 2009 at 10:00am in Washington, DC to announce the unprecedented abundance of U.S. natural gas supply, as well as future consumer impacts. With climate change and energy proposals being considered on Capitol Hill this summer, we think that that these new natural gas discoveries are changing the national debate on energy and future domestic energy supplies. After reading this article, what do you think?

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Tags: market

Speculation in the natural gas market

January 29, 2009 by Andrew Soto · 2 Comments
Filed under: energy

Energy market speculation remains an area of concern. On January 22, I participated in a teleseminar sponsored by the National Regulatory Research Institute discussing speculation in commodity markets, and whether speculation was a cause of the significant price increases in the natural gas market experienced last spring and summer. The main feature of the seminar was a paper written by Ken Costello entitled, “Speculation in the Natural Gas Market: What It Is and What It Isn’t; When It’s Good and When It’s Bad.” All in all, the paper did a very good job of describing a complex issue, and properly focused on the potential for investment capital to flow into commodity markets in ways that adversely impact consumers, businesses and financial markets.

In general, commodity consumers should be protected from harmful price movements that may be caused when investment capital flows into commodity markets in ways that produce prices untethered to supply and demand fundamentals. However, efforts to prevent those kinds of capital flows should not result in “good” speculators exiting the financial markets in ways that impair the efficient functioning of the financial markets. Follows is an overview of my remarks.

Microsoft Word - Speculation Paper Printable Final 11-6-08.doc Natural gas consumers have, on balance, benefited and continue to benefit from competitive wholesale natural gas markets. Gas utilities purchasing on behalf of natural gas consumers have an interest in making sure that both physical and financial markets for natural gas are efficient and deliver the benefits of competition to natural gas consumers. Physical wholesale natural gas markets should be workably competitive and produce accurate price signals that reflect not only the momentary balancing of supply and demand but also long term investments costs for the production, transportation and storage infrastructure needed to bring gas supplies to market. Financial markets should allow gas utilities to hedge their gas procurement costs to reduce the impact of price volatility on customers. Both physical and financial markets should be sufficiently liquid with geographically diverse counterparties, transparent as to price formation and risk allocation, and free from manipulation and the sustained exercise of market power.

When capital flows into commodity financial markets in sufficient quantities that result in prices that are untethered to the underlying fundamental supply-demand balance or long-term infrastructure costs (whether it’s speculative bubbles or herd mentality), markets eventually correct such flows. However, these events can adversely affect consumers, businesses and financial markets. The concern is not so much that investors should be protected from the adverse impacts of the bursting of a bubble they helped to create. Rather, the concern is that commodity consumers should be protected from significant and harmful price movements that may be caused when capital flows in ways that do not reflect the momentary balancing of supply and demand or the long-term infrastructure costs needed to bring supplies to market.

That said, the prescription for protecting commodity consumers should not itself have an adverse impact on the efficient operation of physical or financial markets. We have all seen well-intentioned legislative and regulatory initiatives to correct certain market flaws succumb to the law of unintended consequences in ways that adversely impact consumers. With regard to speculation, efforts to prevent the kinds of capital flows that generate harmful price movements should not result in so many “good” speculators exiting the financial markets that the remaining potential counterparties are able to exercise market power or that the cost of hedging becomes unreasonable thus raising prices to consumers or exposing consumers to greater price volatility.

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