Falling Natural Gas Prices, Historic Supplies Upends Short-Term Economics in the Utility Industry

Natural gas futures prices inched north of $2.30 per 1,000 cubic feet for the first time in several days, but it underscores the pessimism by some utility companies in the economics of building new nuclear, alterative energy, and new coal power plants. The Energy Information Administration (EIA) reported late last week that coal's share of power generation fell below 40 percent for the first time since 1978 during November and December of 2011. According to an article in today's Wall Street Journal, NRG's CEO David Crane observed, "It's killed off new coal and now it's killing off new nuclear."

With natural gas storage levels near capacity due to huge production increases form hydraulic fracturing, utilities are planning to build upwards of 250 new gas-fired power plants by 2015. Gas markets basically serve three customers: utilities, home-heating, and industries like plastics or fertilizer which use natural gas as primary feedstock. Historically, natural gas power plants are easier to permit and enjoy substantial cost savings during construction versus nuclear power; EIA estimates they are more than five times cheaper per kilowatt hour of capacity to build and fuel compared to nuclear. Although there is a substantial difference in the construction cost, once nuclear power plants are built they are significantly cheaper to operate than natural gas plants and are not subject to price swings of commodities nor do they emit any greenhouse gases. One constraint in building new gas plants is that they be located near the interstate transmission pipeline network and plants occasionally face supply disruptions during prolonged cold weather when demand outpaces supply for home-heating needs. 

Utilities have another financial incentive besides low prices to pivot towards natural gas, namely spare generating capacity that was built during the last boom cycle in the late 199Os and early 2000s. For instance, more than 60,000 megawatts of gas power plants were built in 2001 alone (nearly enough capacity for 120 plants) that were largely used only during peak hours when the grid was stressed because of traditionally high fuel prices before the fracking boom. In the midst of the euphoria over low prices (the Federal Reserve Bank estimates up to $16.5 billion in customer savings) there is a realization that they may not remain so in the future. When considering future action, state policymakers and especially rate-making agencies like utility commissions must weigh several complex factors that are often out of their control. Does it make sense to approve new cost recovery rates for expensive projects when current natural gas prices are so low? For instance, the Nuclear Regulatory Commission can only review a new license application at the breakneck pace of four years and it only recently approved the construction of the first new nuclear plant in 33 years. Further, the extension of traditional incentives like the federal production tax credit for renewables are tenable at best and Congress has continued to remain skeptical of programs like loan guarantees because of the high-profile demise of recipients like Solyndra, Ener1, and Evergreen Solar. Without these forms of financing, do these projects still make economic sense for utilities or, more importantly, ratepayers? The answer won't come today, but state policymakers should take note of the historic changes occurring in energy markets and its impacts for future power generation.