Should power generators get to lock in natural gas prices?

Hershey, Pa., June 25, 2012 – Small changes in current fuel contracting practices can deliver large dividends over the next decade due to record low prices for natural gas, according to a new study by a Washington, D.C., energy nonprofit.

Consumers could save billions of dollars on future utility bills if power plants fired by natural gas used longer-term contracts to acquire a portion of their fuel, rather than relying solely on spot market purchases as is common today. This is according to a report released at a mid-Atlantic meeting of utility regulators in Hershey, Pa., the American Clean Skies Foundation.

According to the report, the current benefits of low prices might be short-lived if, as expected, natural gas prices trend upward by mid-decade. Accordingly, the report advises power companies, gas suppliers and regulators to work together and agree on new commercial and regulatory terms to “lock in” today’s attractive price terms for several years.

Power sector stakeholders should consider new multi-year gas supply agreements, the report says, and both utilities and gas suppliers must be willing to share some of the risks of future price changes.

Gregory C. Staple, the CEO of ACSF and co-author of the report, said, “The once-in-a decade opportunity we see for electricity generators to secure affordable gas over the mid- to longer term is similar to the historic opportunity that homeowners and businesses now have to refinance mortgages at today’s record low interest rates.”

Staple added, “The prudent use of some longer term gas supply agreements can reduce risks for gas suppliers, electricity generators and customers alike. That’s why our report is called a ‘no regrets’ guide.”

Long-term contracts provide a means for extending the benefits of affordable natural gas for years to come. Therefore, the report says that state regulators – PSCs and PUCs – should follow the lead of states such as Colorado and Oklahoma, and authorize longer-term agreements for purchasing natural gas just as they do for long-term coal supplies or renewable energy agreements, where 15-to-20-year contracts are common.

Patrick Bean, an ACSF energy policy advisor and report co-author, said, “Natural gas-fired units currently have an economic advantage over other fossil fuel power plants to the benefit of ratepayers. Our report outlines a mutually beneficial approach for electric utilities and gas suppliers that is capable of sustaining the benefits of affordable, clean, and reliable power for ratepayers.”

According to the Energy Information Administration, the domestic electricity sector will spend $330 billion for natural gas between 2013 and 2020. If just 25 percent of this expected demand is met through long-term contracts based on today’s low price horizon, electricity users can save $16 billion for every $1 per million British thermal units (MMBtu) that such contracts are below average spot prices.

ACSF’s report evaluated several approaches to long-term supply agreements and compared the economics of gas-fired, coal-fired and other generation resources. The analysis found that not only are existing natural gas-fired units cheaper to operate than coal-fired units in the short-term, but that gas units are also the cheapest generation option when considering new power plant investments.

Additionally, ACSF found slack capacity at natural gas combined-cycle power plants is available today. The report says much of that unused capacity can be used in a cost-effective manner with the type of gas-supply agreements described in the report.

The American Clean Skies Foundation is a Washington-based nonprofit founded in 2007 to promote a cleaner environment through the expanded use of natural gas, renewable energy and energy efficiency.

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Should power generators get to lock in natural gas prices?

Hershey, Pa., June 25, 2012 – Small changes in current fuel contracting practices can deliver large dividends over the next decade due to record low prices for natural gas, according to a new study by a Washington, D.C., energy nonprofit.

Consumers could save billions of dollars on future utility bills if power plants fired by natural gas used longer-term contracts to acquire a portion of their fuel, rather than relying solely on spot market purchases as is common today. This is according to a report released at a mid-Atlantic meeting of utility regulators in Hershey, Pa., the American Clean Skies Foundation.

According to the report, the current benefits of low prices might be short-lived if, as expected, natural gas prices trend upward by mid-decade. Accordingly, the report advises power companies, gas suppliers and regulators to work together and agree on new commercial and regulatory terms to “lock in” today’s attractive price terms for several years.

Power sector stakeholders should consider new multi-year gas supply agreements, the report says, and both utilities and gas suppliers must be willing to share some of the risks of future price changes.

Gregory C. Staple, the CEO of ACSF and co-author of the report, said, “The once-in-a decade opportunity we see for electricity generators to secure affordable gas over the mid- to longer term is similar to the historic opportunity that homeowners and businesses now have to refinance mortgages at today’s record low interest rates.”

Staple added, “The prudent use of some longer term gas supply agreements can reduce risks for gas suppliers, electricity generators and customers alike. That’s why our report is called a ‘no regrets’ guide.”

Long-term contracts provide a means for extending the benefits of affordable natural gas for years to come. Therefore, the report says that state regulators – PSCs and PUCs – should follow the lead of states such as Colorado and Oklahoma, and authorize longer-term agreements for purchasing natural gas just as they do for long-term coal supplies or renewable energy agreements, where 15-to-20-year contracts are common.

Patrick Bean, an ACSF energy policy advisor and report co-author, said, “Natural gas-fired units currently have an economic advantage over other fossil fuel power plants to the benefit of ratepayers. Our report outlines a mutually beneficial approach for electric utilities and gas suppliers that is capable of sustaining the benefits of affordable, clean, and reliable power for ratepayers.”

According to the Energy Information Administration, the domestic electricity sector will spend $330 billion for natural gas between 2013 and 2020. If just 25 percent of this expected demand is met through long-term contracts based on today’s low price horizon, electricity users can save $16 billion for every $1 per million British thermal units (MMBtu) that such contracts are below average spot prices.

ACSF’s report evaluated several approaches to long-term supply agreements and compared the economics of gas-fired, coal-fired and other generation resources. The analysis found that not only are existing natural gas-fired units cheaper to operate than coal-fired units in the short-term, but that gas units are also the cheapest generation option when considering new power plant investments.

Additionally, ACSF found slack capacity at natural gas combined-cycle power plants is available today. The report says much of that unused capacity can be used in a cost-effective manner with the type of gas-supply agreements described in the report.

The American Clean Skies Foundation is a Washington-based nonprofit founded in 2007 to promote a cleaner environment through the expanded use of natural gas, renewable energy and energy efficiency.