Energy Insider Blog

The United States faces a new future with a real possibility of energy independence rather than some pie in the sky notion predicated on unproven technologies.  One of the key drivers behind this new opportunity for energy independence is the emergence of shale gas, particularly in the Marcellus Shale in Pennsylvania.  While there are other areas of the country with larger shale deposits, the Marcellus holds particular benefits because of its proximity to the major population centers along the East Coast.  The boom in natural gas and other petroleum rich products along the East Coast has created opportunities for energy management consultants to manage their clients overall energy expenditures in new ways.

With President Obama directing the Environmental Protection Agency (EPA) to implement policies to curb emissions from coal fired power plants, the Mercury and Air Toxin Standards (MATS) rule taking effect and continued low prices, it has become uneconomic for older and smaller coal plants to install environmental controls. Between 2013 and 2016 approximately 40,000MW of coal generation will be retired.

On July 30, 2013, Direct Energy Business Services (Direct) announced that it was acquiring Hess Energy Marketing, a long-time powerhouse of electricity and natural gas supply in the Northeast.  According to published reports, Direct paid over $730 million dollars for Hess, not including an additional $300 million in working capital.  This acquisition did not shock the industry as Hess had been trying to sell its energy marketing business to focus on its exploration and production activities. This highlights an emerging trend in the energy markets that could have meaningful implications for end users in the energy industry—namely a move towards consolidation.

At the Texas Public Power Association conference on July 24^th, Trip Doggett, the CEO of the Electric Reliability Council of Texas (ERCOT) provided a tremendous amount of information and insight in to the state of the Texas wholesale power market.  Some of the key areas he covered included:

Shale gas exploration and production has been a boom to the energy sector.  Suddenly, the U.S. is awash in ample supplies of natural gas and oil.  The explosion in energy resources available from shale deposits in the continental U.S. has led the Energy Information Administration to opine that the U.S. could be completely energy self-sufficient in the next 20 years.  However, this unexpected expansion of oil and gas exploration and production has stressed the electric transmission systems, especially in areas of West Texas, where the available transmission capacity has not been able to keep up with demand.  Electricity usage in West Texas has risen more than 20% since 2009. Therefore, congestion costs increased dramatically. From 2011 to 2012, congestion charges increased ~390% on average.

According to the Energy Information Administration (EIA), the electricity generation sector is responsible for over 90% of the total coal consumption in the U.S., and coal fired generation has historically been the most prominent source of electricity production.  As seen in the graph below, however, natural gas has been increasing its market share as generation feedstock over the past couple of years. In February 2012, Coal and Natural Gas had the same percent share of power generation in the U.S.

In 2012[1], the Environmental Protection Agency (EPA) suffered a legal set-back as the Court of Appeals for the District of Columbia (D.C. Appeals Court) struck down the agency’s Cross-State Air Pollution Rule (CSAPR).  CSAPR set emission reductions goals for sulfur dioxide and nitrogen oxide for not only the pollution sources in the state, but also attempted to regulate these emissions that are blown across state lines. 

Every year, Potomac Economics, publishes Independent Market Monitoring (IMM) reports for multiple electricity wholesale markets. The annual reports provide a competitive assessment of such markets.  Over the past several years, the IMM has consistently found that the ERCOT markets are generally competitive and functioning well, although the IMM has always suggested market enhancements.  In the 2012 State of the Market Report, there was significant emphasis in discussing one of the largest challenges facing the ERCOT market—future resource adequacy.  While resource adequacy presents a challenge to ERCOT as the grid operator, it provides opportunities for end users to participate in Demand Response programs as part of a comprehensive risk management strategy.

In many states, end use customers, have the choice to select energy suppliers to serve their natural gas and/or electricity needs. While selecting an energy  supplier might seem to be a simple task, there are multiple factors that need to be considered. Choosing a supplier based only on “lowest price”, could result in unexpected charges and unpleasant surprises down the road.  

As business has become increasingly competitive, the importance of controlling costs wherever possible has increased as well.  In various parts of the country, one area of potential cost control involves energy procurement.  While the opportunity to control energy costs exists, understanding this opportunity and capitalizing on it requires careful analysis and planning.