Opportunities for the Brave

Deck: 

Navigating the power and gas markets.

Fortnightly - June 2012
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The power and gas markets look very different today from what we were anticipating three to four years ago. Gas has gone from seeming shortage to seeming abundance with recent spot prices falling to well under $3/mcf. Power prices and volatility are down significantly. Demand is soft and excess capacity exists in most of the country. While it might be easy to attribute the conditions in the power markets largely to the recession, the reality is that the fundamentals of the market are materially changing—creating opportunities while revealing new pitfalls.

Predictably, margins and earnings have declined across the value chain. And no strong, high-certainty corrective trends are appearing. The marginal price of power and average utilization of capacity are at cyclical lows. Gas producers are incented to actively explore and produce on current leaseholds—often at below average cost—keeping gas prices low. At the same time, regulatory incentives created a mini-rush of renewable generation and energy efficiency into a long supply market. In addition, the moderating influence of a coal force-out hasn’t, and might not, materially occur. Predictions about coal’s demise might have been premature and overestimated in light of the legal and legislative backlashes against aggressive environmental regulations regarding toxins, greenhouse gases, siting, etc.

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