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Gas Dependency Looming?

The best way to get $6 natural gas is to have everyone plan on $3 gas.

That was a sentiment heard repeatedly last week, during the winter meeting of the National Association of Regulatory Utility Commissioners (NARUC) and the Department of Energy's National Electricity Forum in Washington, DC earlier this month.

With inventories consistently high and next-month prices dipping below $2.50 per million Btu, natural gas has become the default choice for power generators – and that's the problem.

Spurred by looming Environmental Protection Agency (EPA) limits on mercury and other coal plant pollutants, generators are assessing whether older coal plants should be backfit with stack controls, or converted to another fuel, or just shut and replaced. With compliance required in the next three to five years, decisions on tens of thousands of megawatts of generating capacity have to be made very soon, and the consensus seems to be that gas is the only economic alternative to retrofits. Read more about the new EPA rules and their impacts here.

But that consensus is based on continuing low gas prices. Both speakers and attendees expressed worry that, with everyone turning to natural gas, historic price volatility will return and bite electricity consumers.

Prices have dropped to what virtually everyone says are unsustainable lows since advanced technology, using horizontal drilling and hydraulic fracturing, opened up vast new resources in gas shales around the country. In less than 10 years, shales have gone from virtually nothing to about quarter of US output in 2010, according to the US Energy Information Administration.

Cal Cooper of Apache Corp. told the NARUC conference that it is "very difficult" to see gas going "above $5 anytime soon." Shale gas' sheer abundance means worry about price spikes is needless, he said.

Learning From History
piking gas prices, most recently in 2008 when gas briefly neared $14, and many utility executives remain leery of too much dependence on natural gas suppliers.

John Bear, President and CEO of the Midwest Independent System Operator (Midwest ISO), said with the short EPA compliance schedule, generators will all be turning to natural gas in the same few years, which could mean price volatility. Some analysts have already predicted price spikes in 2015-16.

But utilities have been burned in the past by s
For gas suppliers, Bear said that new generator demand could also require $2 billion in infrastructure investment in the MISO area alone. Claire Moeller, Vice President of Transmission for MISO, said many gas pipelines near affected coal plants are simply too small to supply replacement generation.

At a recent Senate hearing, Jim Burkhard of IHS CERA said a significant challenge from the shale bounty is "getting pipelines to the right places," taking production from areas that didn't previously produce, or were consumers. "The pipeline system has yet to catch up," he said.
Federal Energy Regulatory Commissioner (FERC) Philip Moeller said with the country "awash in natural gas," it's difficult to make any financial case for alternatives, especially since, in utility terms, EPA's deadlines are "basically tomorrow."

He urged state regulators to consider moving to real-time, dynamic pricing, which could signal consumers to save money by cutting back their usage in costly peak times, reducing the need for new generation.

That is supposed to be an eventual benefit of smart meters now being rolled out around the country, but roll-outs are still being debated and many regulators are not optimistic consumers will embrace the idea.

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