Managing Risk Due to Changing Natural Gas Prices
Prices are down—way down—for natural gas. According to a recent report in the Wall Street Journal, natural gas futures hit a three-year low this year. But, as the Wall Street Journal and other observers report, these low prices aren’t likely to stick around. Reasons for this include:
- Demand for natural gas is expected to increase as the drive to reduce greenhouse gases—domestically and internationally—results in an increasing shift from coal-fired generation to cleaner natural gas.
- Natural gas is also gaining a foothold in the transportation industry, as some diesel-powered trucks are converted to natural gas and sales of compressed natural gas vehicles continue to rise.
- Meanwhile, domestic production of natural gas will decrease if prices continue to fall. Environmental concerns about natural gas fracturing (aka “fracking”) may also slow the recent influx of domestic natural gas sources.
All of this points to the end of relatively low natural gas prices, and for many power companies it is cause for concern. How can they plan for the future when their generation portfolio is dominated by natural gas, subject as it is to volatile changes in price? If they do not do something to manage this risk, these power companies will find themselves forced to pass their increased natural gas prices onto consumers in the form of higher electric rates, or shift back to lower cost coal generation which will increase their emissions.
In Order To Manage the Risk of Natural Gas Prices, Diversify
Newer, so-called “alternative” power generation technologies are not just good for the environment, they can also help power companies reduce the risk of natural gas-heavy power generation portfolios. Some of these alternative power generation technologies are farther along in their development than others, but all of them deserve a look. They include:
- Wind power, both land-based and offshore
- Solar power, including rooftop solar and utility-scale photovoltaic (PV) and concentrated solar power (CSP)
- Small modular reactors, a potentially lower-impact and easier-to-site form of nuclear energy
- Distributed power, moving power generation away from large power plants and into smaller, localized sources
- Capture and storage of CO2 that can reduce the environmental impact of coal technologies
- Electricity storage would provide greater reliability of power supply and increase the attractiveness of intermittent renewable technologies
Of course, like natural gas, all of these technologies have some form of uncertainty. Among other things, power companies that are considering investing in these technologies need to know if and when they will be adopted, how they will affect electric rates, what technologies they will displace, and how their adoption will impact other aspects of the economy, such as jobs and plant closings.
What is the best way to get this information?
What Not to Do
As we discussed at length in our recent white paper, assessing the impact of an alternative power generation technology is not as straightforward as it seems. Any given power technology has the potential to intersect with a wide range of economic sectors and geographic regions in hard-to-predict ways. Projections provided by developers and supporters of a technology could be biased and, therefore, unreliable. Computer modeling can be an effective method, but the scope of the computer model cannot be too narrow, restricted to a single energy sector or region.
What to Do: Integrated Modeling
For the best information about the future of an alternative power generation technology, we recommend integrated modeling. This is a computer modeling approach that considers all energy supply and demand sectors, their interactions especially through prices, and how actions in one sector might stimulate or dampen activity in another.
For example, as we have already seen, natural gas prices and electricity prices are very closely linked. Companies and organizations interested in how fluctuating natural gas prices could change their electric rates, and how consumer energy use will change in response to higher prices, are best served with a model that can simultaneously evaluate multiple energy sectors, including the natural gas market and end-use sectors such as households in addition to the electric power market.
For more on how integrated modeling can be used to determine the future of alternative power generation technologies and to plan a power generation portfolio wisely, download our newest white paper, “How to Assess the Impact of Alternative Power Generation Technologies.”