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Utilities Nervous About Gas Supply
Northwest utilities are running up against an unavoidable and ominous reality as they plan future power resources. The natural gas market is turning rough, and the long-range outlook indicates things could get worse. In October, PacifiCorp was forced to conclude that continued dependence on natural gas-fired generation is risky; the utility's plan recommends an infusion of fixed-cost renewables to increase stability. This month, Oregon Public Utility Commission staff rejected Portland General Electric's resource plan, in part because it relied too heavily on gas.
Terry Morlan, manager of economic analysis for the Northwest Power and Conservation Council, says the natural gas market is "very nervous" right now because the future availability of natural gas is uncertain. Producers have traditionally maintained a 15- to 20-year supply of proven reserves. But since electricity market deregulation, cost pressures have cut that reserve almost in half, says Morlan.
Newspaper stories and industry reports on the relatively slow rate of exploration and drilling have contributed to market instability and higher prices, he says. Meanwhile, demand for natural gas is expected to grow by more than 50 percent over the next two decades as it becomes more popular as a fuel source. Among the factors keeping the market on edge:
- Industry reports that British Columbia gas deposits are being depleted rapidly, with production declining some 20 percent per year. Without significant new drilling, this could bump up prices on the all-important Canadian market, which supplies about 80 percent of the Northwest's natural gas.
- Bold proclamations made by industry seers such as Houston's Marshall Adkins, who told the Houston Business Journal that he predicts a floor price of $5 per thousand cubic feet in 2003, with that rate rising to $7 or $8 early in the year. Don't bet against Adkins, with the price hovering near $4 per thousand cubic feet in early December, he predicted a runup to $5 by the end of the year *#150; the New York Mercantile Exchange Price as of January 20 was $5.31.
- Slow going in the area of exploration and drilling, due to last year's warm winter and frigid economy. Marc Smith, executive director of the Denver-based Independent Petroleum Association of the Mountain States, says the Enron collapse and the troubles of other merchant energy companies have led to a credit crunch in the industry and dried up funding for independent drillers.
Smith says that without available credit or financing from big energy companies, drilling and exploration expenses come straight out of a producer's revenues. When prices are low, it makes more sense to pay off debt than gamble on searching for new natural gas deposits. The current jump in natural gas prices should get the exploration market humming again, he says, but the new supply will take a couple of years to come on line, leading to a period of tightening supply and rising prices.
That's particularly bad news for Northwest utilities and consumers. The region's hydropower system is becoming increasingly vulnerable to drought as regional electricity demand increases, carrying the threat of future power crises like the one that sent electric bills soaring in 2001. To step up supply, thousands of megawatts of natural-gas generation – enough juice to power several cities Ð have been proposed in the region. But if gas becomes more precious, the region could face devastating double whammies during dry periods.
That looming possibility, when figured into utility forecast models, tends to favor renewable resources – which have no fuel costs and are thus relatively unaffected by outside energy markets – as the best bet for ratepayers. Energy efficiency investments also rate highly because many are cheaper than the cost of new power even at current price levels. PacifiCorp's plan shows a new awareness of the value of efficiency as well as renewables, and Puget Sound Energy has stated its intention to aggressively pursue efficiency as part of its least-cost plan, due in February.
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James Bush and Kevin Fullerton