Power Industry Changes Affect Forward Pricing

  October 22, 2012

Today's tip comes from Lindsay Audin, president of EnergyWiz consulting firm in Croton, N.Y. A series of air pollution rules from the U.S. Environmental Protection Agency and the low price of natural gas are affecting forward retail power pricing in large parts of the United States. The biggest effect is on coal-fired utilities, which have also seen falling demand, due mostly to the anemic economy.

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. At the same time, three EPA emissions rules are likely to take effect over the next several years. One covering carbon was upheld in federal court in June. A second, regarding mercury, 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. A replacement SOx/NOx rule may appear by 2015. Coal-fired plants produce greater amounts of all those emissions than other energy sources.

At the retail level, some 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 falls, peak demand charges in some areas are rising to cover the cost of obtaining additional power. The end result is that customers with low load factors (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.


Read next on FacilitiesNet