In competitive power markets based on locational marginal pricing (LMP), the facts sometimes conflict with popular belief. Most notably: 1. When there’s congestion, the books don’t balance, and...
Gas Without Regrets
How suppliers and generators can each gain from today’s historic low prices.
What happens next?
That’s the question many industry watchers recently began asking after the Energy Information Administration (EIA) reported in April that, for the first time, power plants fired by natural gas had matched the nationwide share of coal-fired generation—32 percent for each. The April data was so surprising because, just two years earlier, coal-fired power had attained a market share of over 44 percent, with gas lagging at 22 percent.
The environmental and economic benefits from the rapid increase in gas-fired power have been considerable. International Energy Agency (IEA) data shows U.S. greenhouse gas emissions fell about 8 percent from 2006 to 2011, primarily due to switching from coal to gas in the power sector. 1 Toxic air emissions (SO 2, NO x, mercury) also fell apace. And, according to EIA, electricity rates also have remained relatively flat for three years in a row.
But again, what happens next? Will coal-fired power regain its historic market share, as some predict (see Figure 1), when natural gas prices trend upward? Or can gas-fired power continue to hold its own?
“Prediction is very hard, especially about the future,” Yogi Berra famously said. However, we think that if key stakeholders are prepared to make some modest commercial and regulatory adjustments, there is an attractive path forward for gas-fired power—a path that locks in today’s historic low commodity prices to deliver tens of billions of dollars of ratepayer benefits for years to come. The environment and public health also would be big winners.
The plan we favor is detailed in a new 45-page “Power Switch” report we authored earlier this summer for the American Clean Skies Foundation (ACSF), a Washington, D.C. nonprofit. It includes two major parts:
First, a new set of long-term gas purchase agreements—and associated hedging arrangements—that share some of the risk of future price changes between natural gas suppliers, on the one hand, and power generators and consumers, on the other. These new agreements would provide mutually beneficial incentives for gas suppliers and power generators. For example, suppliers and generators could agree to a fixed price for a portion of the fuel, with the balance priced at the market rate. (See Figure 4)
Second, a level, nondiscriminatory playing field for regulatory review and approval of prudent long-term natural gas supply agreements. That would allow regulators to judge options for gas-fired power generation on a fair and level basis vis-à-vis other power sources that routinely make use of long-term supply agreements ( e.g., coal, renewables).
We have dubbed our approach the “no regrets” plan. By sharing the risk of future price changes, the plan seeks to minimize the potential losses and to maximize the potential gains for both gas buyers ( e.g., utilities) and fuel sellers.
Time to Lock In
In many ways, the opportunity to lock