Part 1: Forward Retail Power Pricing Affected By Legal Issues, Natural Gas Prices
Forward Retail Power Pricing Affected By Legal Issues, Natural Gas Prices
By Lindsay Audin October 2012 - Power & Communication
A series of air pollution rules from the U.S. Environmental Protection Agency, court decisions affirming or overruling those regulations, and the low price of natural gas are having an impact on forward retail power pricing in large parts of the United States. The biggest effect is on coal-fired utilities, which dominate grids in midwest, south, and central eastern states.
Those plants have been facing a multiple whammy as demand dropped (due mostly to the anemic economy), natural gas displaced coal as a cheaper fuel source, and three overlapping EPA rules loomed on the horizon. As a result, plans for most new coal plants have been scrapped or postponed, some existing plants have been mothballed, and other existing units are being converted to or replaced by gas-fired generation.
In April 2012, for the first time, natural gas accounted for as much electricity as coal. As long as gas pricing remains relatively low (i.e., below about $3.50 per million BTU at wholesale), it will compete with coal, whose price has already been forced down, yielding lower electric pricing from both sources.
At the same time, three different and unrelated EPA emissions rules are likely to take effect over the next several years. One of them — regarding carbon emissions — was upheld in a federal court in June. A second — regarding mercury emissions — is on track to take effect by 2015. And a third — covering sulfur oxide, or SOx, and nitrous oxide, or NOx, pollution — was overruled in late August by a federal court. Because coal-fired plants produce greater amounts of all those emissions than other energy sources, they fall squarely into EPA's crosshairs.
Seeing the writing on the wall, the power industry has already "baked" into its forward pricing and planning much of the overlapping impacts of those factors. While some coal-fired plants got a reprieve with the August decision, the federal appeals court told EPA to go back to the drawing board and re-draft (not drop) its rules. Depending to some degree on the outcome of the presidential election, a replacement SOx/NOx rule may appear by 2015.
When it comes to retail power pricing, some of the factors cancel each other out. While tighter emission rules may raise power prices, low natural gas pricing has already suppressed them, making the net effect small in most areas. Where coal provides more than 50 percent of a utility's power, however, there may still be price pressures. Utilities buying cheap natural-gas-fired power from the local grid must still pay off their coal-fired units even when they are used less (or not at all). Determine your utility's coal dependency by reviewing its Environmental Disclosure Label.
In some areas, these competing trends are changing the structure of power pricing. Even as energy pricing (i.e., cost per kilowatt-hour) falls, peak demand charges (i.e., cost per kW) in some areas are rising to cover the cost of obtaining additional power. The end result is that customers with low load factors (i.e., average demand divided by peak demand) may see higher average power pricing. The effect of these changes on efficiency upgrades will vary. Those participating in demand response programs may see increased revenue from them, and those pursuing load management may save more from such efforts. Measures that mostly reduce consumption will still pay off, but perhaps not as lucratively.
Lindsay Audin, CEM, LEED AP, CEP, is president of EnergyWiz, an energy consulting firm based in Croton, N.Y. He is a contributing editor for Building Operating Management. He can be reached at email@example.com.