<Katie asked me to send this on to team.net>
Gang,
I heard nobody wanted to talk about football and many are tired of Florida,
so thought I could offer some perspective on some energy issues that will
affect pocketbooks this winter -- especially since most of the press is
incapable of getting the story straight (note USA Today headline a month or
so ago: "Fuel Crisis Looms"). I feel just a bit obligated to let you know
what is really going on.
If you live in evil, left coast California as I do, your gas bill shows how
many therms you consumed last month and the price per therm, usually in
rates that increase as you consume more. Many other utilities across the
country do this, too. The price you probably saw there last year was on
the order of $1.00 per therm. Of that $1.00, about $0.350 was the cost of
the natural gas; the rest was for transportation of that gas to your local
citygate and then through the local utility's little pipes to get to your
meter at home. (For some utilities the price is a constant all year long,
for others such as those in California, the "commodity" portion of the price
changes each month depending on the cost of the gas purchased by PG&E or
SoCal.) This year, if cold weather this week holds across much of the
country, it looks as though the December futures contract for gas will close
to $0.70 per therm -- that's double the price this time last year. All else
equal, this means many of you will experience natural gas bills totallying
roughly half again what you paid last year.
Quickly, let me put this into perspective for electric rates. Electric
utilities frequently burn natural gas to produce the marginal unit of
electricity, even in states that rely primarily on coal or nukes or even
hydro-electric power (like up in Northwet Region). Multiply the $0.350 per
them cost of gas from above by 10 to get $3.50 per Decatherm (makes the
later math easier, trust me). Now assume an average heat rate in a power
plant boiler or combined cycle unit of 10,000 btu per kwh ..... (so multiply
$3.50 per MMBtu times 10,000 btu per kwh) and you get a kwh of electricity
costing $35.00 per MWh ($0.035, oh I hope I got the units right for you,
per kwh or 35 mills as it is sometimes known) as the wholesale cost of
power. The average price to consumers across the country is on the order of
$60 per MWh -- not quite double the actual cost to generate the stuff. This
summer's wholesale prices in California reached $250 per MWh! The Texas
market has experienced similar peaks, as have the Chicago market, New
England, and PJM at various times over the last two years.
What is the outlook? You should all expect continued high prices throughout
the winter. By continued high I mean in the $4 - 5 per MMBtu (that's $0.40
- $0.50 per therm .... since most consumers don't use more than 30 - 50
therms per month, your bills are all done in therms and geeks like me have
to convert constantly) range. This means if your bill was $100 per month
last winter, budget $150 this winter. If the weather is cold,
particularly during the last week of each month when the futures contract
for the upcoming market closes and the cash and futures prices usually
converge, then you should expect higher prices. Sunny San Diego set a
record for gas sendout (that's a technical gas geek term for gas flowing
through the pipe to customer burnertips) last week and curtailed gas
service to electric powerplants. Normally, California utilities would be
expected to set any new sendout records mid-late December to mid-late
January. This was NOT, I repeat NOT, a gas supply shortage -- it was a gas
pipeline capacity shortage between SoCalGas and San Diego --- meaning not
enough pipe to move available supply to the San Diego market. And in fact,
as Keli Cadenhead's Dad will agree, the pipe isn't sized to meet max-max day
peak demand ..... that would cost too much, so the pipe is sized to handle
some estimate of extreme peak demand for just residential and small
commercial customers. Back east the industrial customers are routinely
bumped from the pipe almost every winter for much of the winter ... we in
California are simply spoiled, as usual -- and our air quality regs don't
allow them to switch to oil very often, but that's another story.
Is there enough gas? yes, there is, Virginia! There is more than 50 years
worth available, economically accessable at prices below $2.50 per Decatherm
(same as MMBtu) without drilling in ANWR or bringing in new gas from the
MacKenzie Delta in Canada. Why are prices so high, then? Remember back
about 2 years ago when oil prices cratered at close to $11 per barrel??
Well, the companies that drill for natural gas are the same ones, by and
large, that drill for oil. When their profits plummet, they cut back on
their budgets for exploration and production. In essence, the industry
slowed the rate at which it sucks gas out of the ground, and, at the same
time started a lot of yak about the number of new gas-fired power plants
would get built. The market responded with higher prices and gas producers
who have long felt their commodity was underpriced are very happy campers
(who should undoubtedly spend some of their increased profits by sponsoring
more race cars!). My forecast is for continued high prices through the
winter. A mild Winter (not what is being predicted based on what I've seen
from NOAA) would create lower prices. By March additional gas supply from
the higher drilling activity over 2000 (brought about by OPEC's resolve to
sustain world oil prices around $25 per barrel) should begin to create more
moderate prices. In fact, my forecast for 2001 is $3.25 per MMBtu, if you
really want to know, assuming we drill 18,000 new wells and the weather is
normal. I suspect when I update my model I may end up closer to $3.50 for
next year.
Thanks for listening. I feel better having provided this briefing. Now ...
back to your regularly scheduled topics. I hope this makes the whole
scenario a little more understandable and less frustrating when you have to
write that check to your local utility.
(NO, I NEVER get excited about seeing big compressor stations or powerplants
or gas pipelines crossing rivers on long road trips, either.)
Katie
Catherine M. Elder
Principal
Generator Fuel Support
Navigant Consulting, Inc.
916 852 1300 (voice)
916 852 1073 (fax)
katie_elder@rmiinc.com
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