Shale Gas Keeps Region’s Electric Costs Down

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BY DENISE FUREY/ Shale gas has become a game-changer for electric companies in the Northeast. This is good news for Philadelphia.

Most public-utility executives expect the industry to become increasingly reliant on natural gas as a fuel to generate power. Also, they expect consumers to continue to see modest electric prices at least in the near term owing to low natural-gas prices.

This view resonated through the halls of the annual conference of the Edison Electric Institute, the trade group for US electric utility companies, held in Phoenix, Ariz. recently. Representatives of local electric utilities were there including Exelon Corp, the parent of PECO; PEPCO Holding, the parent of Atlantic City Electric; and PPL Corporation, the parent of PPL Electric Utilities.

The overriding theme of conference was natural gas – in particular Marcellus and Utica Shale gas – put Pennsylvania in the spotlight. The conference this year was called “Game Changer” in reference to shale gas.

In 2012 for the first time, natural gas surpassed coal as the primary fuel used in electric generation in the US, due in large part to its cheaper price. Natural gas is a cleaner-burning fuel than coal and on average emits 50% fewer greenhouse gases.

The increase in the availability of natural gas is owing to the more-effective use of hydraulic fracturing in conjunction with horizontal drilling. Over the four-year period ending 2010, natural-gas production in the US rose by roughly 20% according to the US Energy Information Administration and most of the increase was due to shale-gas extraction.

A combination of the weak economy and the abundance of shale gas had caused natural-gas prices to decline to around $2.50 per MMBTU (a “million British Thermal Units” or MMBTU is a standard measure of energy) range but has recently rebounded somewhat. EIA reported the electric-generation industry on average paid $3.52/MMBTU in September 2012 for the natural gas it used in electric generation.

Note the price utilities pay for gas is a wholesale rate, much lower than your personal home-heating gas rate which includes distribution charges.

IHS Global, an energy consulting firm, expects wholesale gas prices to remain over $3.00 per MMBTU in 2013 and rise to $4.00-$5.00 range by the end of 2015. To put this in perspective, natural gas bought by utilities on average in August 2008 was $21.41/MMBTU. This was just before the production of Marcellus Shale took off and the economy collapsed. The price of wholesale power in the PJM Interconnect, which operates the wholesale electric market in this region, was roughly 40% lower in August 2012 than August 2008, owing again in large part to the change in natural-gas prices and the weak economy.

The demand for natural gas in electric generation is also expected to be impacted over the next few years from more-stringent environmental regulations by the US Environmental Protection Agency. These rules directed at coal-fired plants will lead to the closure of many existing units. According to EEI, US generators have already announced plans to close roughly 10% of the country’s coal units. Many industry experts expect actual closing to be close to double that figure. EEI believes most of this capacity will be replaced by increased usage of existing currently underutilized natural-gas plants or new natural gas-fired facilities.

Despite the increase in demand for natural gas, electric prices are expected to remain low owing to the abundance of supply, thus keeping wholesale power prices moderate.

The implications for local companies are mixed. PECO and Atlantic City Electric are indifferent to the price of electricity, as their profits are obtained through the services they provide in delivering the power and not the electricity itself. The actual cost of the generated electricity is a passed through to the consumer at the price PECO and ACE pay for it. Deregulation of the utility sector forced companies like PECO to sell their generation assets.

In the case of PECO, it sold its power plants to an affiliated company. In Pennsylvania, the consumer can buy electricity from the local delivery company such as PECO or from other providers, but must receive the power through the wires owned by the local distribution utilities like PECO. Unlike Pennsylvania, New Jersey customers can only buy power from their local electric-delivery companies, including ACE. The New Jersey utilities buy their electricity at auctions operated by state regulators. The companies in the area that generate electricity will continue to be profoundly affected by the impact of low natural-gas prices on wholesale electric prices.

Exelon Generation, a sister company of PECO, generates most of its power from nuclear facilities. Therefore, its cost structure has not benefited from declining natural-gas prices. While Exelon is a large company, it does not have the market clout to set prices and thus must accept currently depressed wholesale electric prices. At the EEI conference, Exelon noted it might have to reduce its dividends to stockholders if weak natural gas and thus wholesale power prices persist.

The consumer should continue to benefit from lower natural in the near term. In Pennsylvania, the average utility customer’s bill in August 2012 was 2% lower than the same month is 2011.

A comparison to when natural-gas prices were much higher is not informative. For the 10-year period ending in 2011, most Pennsylvania utilities were operating under price caps as the sector was transitioning to the current price structure.

It should be noted: Even if natural-gas prices remain low over the medium term, consumers may see their overall electric bills rise if delivery charges rise. The utilities, with the approval of state regulators, can raise rates to compensate them for expenditures for infrastructure. An April 2012 report issued by Ceres, a Boston-based public-policy group, estimated the US electric sector will spend $100 billion per annum over the next 10 years on electric infrastructure.

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