As states implement renewable energy mandates, and as solar photovoltaic (PV) technology becomes more economical, the market for distributed rooftop solar is growing. As a result, various players...
Fuel Prices: Headed for a Bull Market
electricity after 1990. This contributed to an abundance of natural gas and low prices. In 1988, the Fuel Use Act was amended to allow electric utilities again to utilize natural gas for power generation.
During the 1950s and 1960s, there was growing interest in environmental issues. This led to the Clean Air Act of 1955 and its amendments in 1963, 1966, and 1970. These laws, combined with low oil and natural gas prices relative to coal and the lower plant capital cost associated with these fuels, caused electric utilities to switch from coal-fueled alternatives to oil- and natural gas-fueled power plants.
The most recent changes to the Clean Air Act became effective in 1987, 1990, 1997, and 2000. The fuel price differentials between crude oil and coal, and natural gas and coal, reached historic lows in the mid-1990s. Their lower plant capital costs, along with the need to comply with more stringent environmental regulations, contributed to natural gas-fueled power plants again becoming more competitive than coal-fueled plants in generating electricity. In many respects, we are now replaying the experience of the late 1960s and early 1970s, just prior to the energy crisis of the mid-1970s.
Future Price of Crude Oil, Natural Gas, and Coal
Energy price forecasts by the U.S. Energy Information Administration's Annual Energy Outlook (AEO) have been a good proxy for the "consensus" forecast. Annual Energy Outlook 2002 8 projects that between 2000 and 2010:
- the real or constant dollar wellhead price for crude oil ($4.80/MBtu in 2000) will decline 1.7 percent per year (others say it will decline 0 to 6.2 percent annually 9);
- the wellhead price for natural gas ($3.50/MBtu in 2000) will decline 2.3 percent per year; and
- the f.o.b. mine price of coal ($0.80/MBtu in 2000) will decline 1.5 percent per year.
Do such forecasts provide a realistic view of the future? Not likely.
There are strong indications that the long-term trend of declining real energy prices, which began in the early 1980s, ended with the price cycle lows for crude oil and natural gas in 1998 and coal in 1999. These low price levels are indicative of a key turning point in the energy market that occurs every 15 to 25 years. From these low price levels there has always been a rapid and substantial price increase.
Figure 2 shows the trend in the length of contract terms for coal purchases by U.S. electric utilities since 1990. There has been a shift from long-term contracts to the spot market and to short-term contracts with a term of two years or less. At the start of 1990, coal purchase commitments of two years or less amounted to 32 percent of total sales, while contracts with a remaining term exceeding 10 years represented 34 percent. In 2000, commitments of two years or less represented 58 percent, nearly double their share in 1990, and those greater than 10 years only 17 percent of total sales, half their share in 1990. As excess production capacity disappears, price volatility will increase, and the market will again shift from one