Gas Market Long-term Price 'Lock-in' Could Save Billions and Reduce Risk

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Written by Richard Finlayson, Senior International Editor for Industrial Info Resources (Sugar Land, Texas)--According to the Energy Information Administration (EIA) (Washington D.C.), the domestic electricity sector will spend $330 billion for natural gas between 2013 and 2020. If just 25% of this expected demand is met through long-term contracts based on today's low price horizon, electricity users can save $16 billion for every $1 per million British thermal units (MMBtu) that such contracts are below average spot prices.

A new study by American Clean Skies Foundation (ACSF) supports this by saying that consumers could save billions of dollars on future utility bills if power plants fired by natural gas used longer-term contracts to acquire a portion of their fuel rather than relying solely on spot market purchases, as is common today. These findings were detailed in a report titled, "Power Switch: A No Regrets Guide to Expanding Natural Gas-Fired Electricity Generation," released at a meeting of utility regulators in Hershey, Pennsylvania.

Current benefits of low prices might be short-lived if, as expected, natural gas prices trend upward by mid-decade. The report advises power companies, gas suppliers and regulators to work together and agree on new commercial and regulatory terms to "lock-in" today's attractive price terms for several years.

Power sector stakeholders should consider new multi-year gas supply agreements. Both utilities and gas suppliers must be willing to share some of the risks of future price changes.

"The once-in-a-decade opportunity we see for electricity generators to secure affordable gas over the mid- to longer-term is similar to the historic opportunity that homeowners and businesses now have to refinance mortgages at today's record-low interest rates," said Gregory C. Staple, ACSF chief executive officer and co-author of the report. "The prudent use of some longer-term gas agreements can reduce risks for gas suppliers, electricity generators and customers alike. That's why our report is called a 'no regrets' guide."

ACSF's report evaluated several approaches to long-term supply agreements and compared the economics of gas-fired, coal-fired and other generation sources. The analysis found that not only are existing natural gas-fired units cheaper to operate than coal-fired units in the short term, but that gas units are also the cheapest generation option when considering new power plant investments. ACSF found that significant slack capacity at natural gas, combined-cycle power plants is available today. Much of that unused capacity can be used in a cost-effective manner with the type of gas supply agreements described in the report.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.