Energy Prices Spiking?

We've been hearing this in many places.   Get ready, particularly on the commercial side, to pay more for electricity.

 

Are Environmental Regulations Causing US Utility Bills to Surge?

As dated coal plants continue to shut down, a new report says two-thirds of US utility bills will spike by as much as 25 percent.

NEW YORK -- U.S. electricity markets face years of higher prices as clean-air regulations shut more coal-fired power plants than earlier forecast, cutting supply and forcing producers to rely more on natural gas.

 

Standard & Poor’s estimates that 40 to 75 gigawatts (75,000 megawatts) of coal units may be shut by 2020, compared with announced permanent shutdowns of 27 gigawatts. About 18 percent of the closures expected through the end of next year will be replaced by natural gas and renewables, BNP Paribas SA forecast.

 

The loss of the cheaper coal units will boost power prices by as much as 25 percent on grids that serve about a third of the nation’s population, according to the Brattle Group, a Cambridge, Massachusetts-based consulting company. The biggest impact may be in the Midwest and Northeast, where demand for gas for heating jumps during the cold-weather months.

 

“We are really in for a wild ride for five to six years because of the amount of coal shutting down in such a short amount of time and the transformation toward more gas being used to generate electricity,” Philip Moeller, a member of the Federal Energy Regulatory Commission in Washington, said in an Oct. 23 interview. “Prices will definitely rise. The question is how much.”

Midcontinent Independent System Operator Inc., or MISO, which manages the electricity network that runs from Manitoba to Louisiana, expects its power reserves to fall short of targets by about 2,000 megawatts by 2016, with deficits mounting after that. Even with the shale boom that’s cut gas prices, power generated with the fuel costs $30 to $35 a megawatt-hour, compared with about $25 for coal, according to Brattle.

 

Frigid Winter

 

Power and gas prices surged last winter when a weather system known as a polar vortex brought frigid arctic air to large portions of the U.S.

 

NRG Energy Inc., the largest U.S. independent power producer, ran some older plants that had been shut for five to 10 years, Chief Executive Officer David Crane said in an Oct. 16 interview at Bloomberg News headquarters in New York.

 

“The polar vortex scared us to death at NRG,” Crane said. “If the polar vortex were to happen two years from now, I don’t know what would have happened in the Northeast.”

PJM Interconnection LLC, whose mid-Atlantic grid is the largest in the U.S., has received notices from plant owners planning to shut 11,578 megawatts of available output through 2015, or about 6.4

percent of supplies as of 2013. One megawatt can power about 800 homes.

 

EPA Rules

 

Half of the plant shutdowns will take effect next year, when the Environmental Protection Agency’s Mercury and Air Toxics Standards, which require coal-fired plants to install scrubbers to remove contaminants or shut down, take effect, S&P said in a Sept. 29 report.

 

While power prices are set to rise, the increase may not be enough to encourage the construction of new plants.

 

“The price that you can see does not justify building,” Crane said. “When natural gas sets the marginal price of electricity, it not only makes it impossible to build any other type of power plant unless there is a market mandate but it also makes it impossible to build natural gas plants.”

 

On-peak power at PJM’s benchmark Western hub, which includes deliveries to Washington, averaged $43.33 a megawatt- hour during the third quarter on the Intercontinental Exchange, the least since 2009, data compiled by Bloomberg show.

 

Wholesale power declined in recent years as the revolution in producing natural gas from shale formations sent U.S. output to records and reduced gas prices by 73 percent from a 2008 peak. Gas futures on the New York Mercantile Exchange were trading at $3.69 per million British thermal units at 9:37 a.m. versus the July 2008 high of $13.577.

 

Coal Plants

 

Some 20,000 megawatts of coal plants, which operated at 38 percent of capacity this year through June, will shut permanently by the end of 2015, Teri Viswanath, director of commodities strategy at BNP in New York, said in an interview yesterday. They will be replaced by about 4,000 megawatts of natural gas capacity, she said, in addition to some renewables.

 

The impact of gas on power costs has increased, according to an Aug. 14 report by Monitoring Analytics, the independent monitor for PJM. Gas set spot power prices 41 percent of the time in PJM during the first six months of 2014, up from 33 percent a year earlier.

 

Gas Projects

 

Of the 35,374 megawatts in gas plant projects planned from 2014 through 2020, 75 percent have not started construction, with many still awaiting regulatory approval, according to the U.S. Energy Information Administration.

 

“We are going through the lightest development cycle we’ve ever witnessed over the next decade and it’s in response to a period of very, very low power prices,” Viswanath said. “What we’re seeing is a net subtraction of supply.”