Energy Insider Blog

For years, coal has been the dominant fuel source for power generation in the U.S.. However, recent changes in the market place, including tighter emissions restrictions imposed by the Environmental Protection Agency (EPA) and low natural gas prices from abundant shale gas suppliers, threaten coal’s dominance as the leading fuel source for generation. An analysis conducted by the Department of Energy (DOE) was published in August and predicted that between 35 and 60 gigawatts of coal-fired electricity generation in the eastern half of the country will be retired within the next five years. Therefore, new generation, transmission investments and reliability must run (RMR) contracts will be needed to maintain grid reliability. Natural gas fired generation will most likely fill the bulk of the gap left by the coal retirements. The impact of retirements and the higher operation costs of the remaining coal plants will trigger an increase in prices. This effect will be magnified in regions that are more dependent on coal fired generation, like the Midwest.

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.

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 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.

Typically, discussions about drought conditions center on the impact a lack of rain has on agriculture; however, water and drought conditions have a significant impact on the energy sector as water is used for cooling purposes in power plants and the lack of water can negatively impact generation, creating stress on the electric grid during periods of high demand.  While the impact of water on power plant output has been understood for years, the explosion in fracking has added another pressure point on the water supply.

According to the National Oceanic and Atmospheric Association (NOAA), summer 2013 will be above average in West Texas and in the Mid-Atlantic states.  The outlook both in terms of temperatures (left hand side) and projected rainfall (right hand side) is summarized in the following set of four maps, with the top maps being the outlook for June and the bottom ones the outlook for the entire summer (June-August).

According to the National Oceanic and Atmosphere Administration (NOAA), the 2013 Hurricane Season is predicted to be more active than normal.  In its forecast released on May 23^rd, NOAA anticipates 13-20 named storms, with 7-11 of those becoming hurricanes and 3 to 6 of those being Category 3 or higher hurricanes.  The averages call for only 12 named storms, 6 hurricanes and only 3 of those becoming major storms.  Given this outlook, the question becomes how will this impact natural gas prices?