A no-holds-barred interview with the electric industry’s chief architect of wholesale electric market design.
The Wonderful Curse
Production constraints and demand pressures mean high gas prices are here to stay.
years. Overall industrial demand destruction now approaches 5.25 Bcf/d as hedges unwind and belief in the permanence of higher prices works its way through industrial users and industries move overseas (see Figure 7) .
Annual consumer or “end use” natural-gas consumption in the United States might increase from roughly 22 Tcf in 2006 to about 32.7 Tcf by 2030, a 2 percent annual increase. Accommodating this sizable increase will require significant investments in natural-gas pipeline and storage infrastructure. The need is compounded further as LNG likely will come ashore in areas not currently able to accommodate and transport large gas volumes without significant new infrastructure.
Industrial demand slides from first place into second by 2012 (see Figure 8) . This occurs in part because of the continued pressure price-sensitive industrial gas consumers will experience under forecasted gas prices, tempered by increased demand for natural gas by the ethanol production industry.
Continued demand growth for generation will place constant pressure on the supply industry’s ability to find and develop new sources of natural gas. Electric generators tend to be far less price sensitive than many industrial consumers. Fuel is only one of several components to the price of delivered power, so higher fuel prices will have a less than proportional impact on power prices.
Much of the gas demand growth in this sector is caused by the delayed impact of the electric-power overbuild. Currently, many power markets are overbuilt significantly with combined-cycle, gas-fired power plants. However, these plants increasingly will be used during the coming 5- to 10-year time frame due to continued electric-load growth, retirements of older existing plants, and new environmental restrictions ( e.g., NO X, SO 2, CO 2, Hg), which will increase the cost of generation for some solid fuel and oil-fired generators.
For example, SO 2 and NO X allowance prices were relatively very high from January 2005 through March 2007 (see Figure 9) . During this period, older vintage residual oil-fired steam-turbine plant was significantly penalized in relation to a gas-fired steam plant of similar vintage. The penalty (an increased SO 2/NOX adder in EPA state implementation plan [SIP] call states and just SO 2 in other states) during this period varied between $0.30/dth and nearly $1.00/dth—a hefty amount. The increased penalty for burning residual fuel oil during 2006 (not just 1 percent sulfur but for other qualities such as 0.3 percent, 0.5 percent, 0.7 percent and 2 percent as well) in part caused greatly increased natural-gas usage for electric generation that year, taking over the number-two spot from nuclear power. In the future, CO 2 adders likely will affect coal and oil plants similarly, being at a proportional disadvantage compared to natural-gas units.
Enjoy Scarcity While It Lasts
The market psychology has been extremely bullish for prices in recent months, as witnessed by the NYMEX gas forward strip as of mid-March 2007. The entire summer of 2007 NYMEX was more than $8/dth, with December 2007 through March 2008 prices near $10/dth. The run-up to record high world oil prices since