The dramatic drop in natural gas prices in the U.S. has been widely discussed in recent months. Prices as of April 27 range from $1.90 to $2.54/MMBtu at various trading points around the U.S. and are at the lowest point in a decade. Some analysts have even suggested that full storage in Fall 2012 could result in spot natural gas prices falling close to $0/MMBtu as producers have to give away gas to keep wells flowing and to produce more valuable natural gas liquids. As you might expect, this scenario has negative impacts on earnings for gas producers, but it also has a dramatic beneficial impact on consumers who depend on natural gas.
In a future blog we will explore the impact that low prices are having on the industrial sector in the U.S. Here, we will use the Atlanta-based utility Southern Company to demonstrate how dramatically low gas prices are impacting the electricity generation sector.
Southern Company executives discussed the company’s fuel mix and future generation plans in Southern’s First Quarter Earnings Call on April 25 (listen to the webcast at http://investor.southerncompany.com/events.cfm). Southern traditionally has been a coal-dominated company. In 2007, Southern, as is typical of historical fuel mixes, generated 70% of its power from coal and 16% from natural gas. The remainder came from nuclear and hydro. By 2011, Southern’s mix was 40% coal and 40% natural gas. Southern projects its 2012 mix to be 35% coal and 47% natural gas.
The shift to gas coupled with low gas prices has a strong benefit for electric customers. For example, Southern’s Georgia Power utility has reduced average fuel prices by 19% resulting in a recent filing asking for a reduction in residential rates of 6%.
But is this a temporary phenomenon driven by a short-term gas boom, or is it a permanent change? Southern clearly believes that gas prices could stay low. Southern is building new gas-fired generation in Georgia and is working to reduce to its exposure to long-term inflexible coal fuel supply and rail transport agreements. But according to one executive, it is an “all arrows in the quiver strategy,” meaning that as it heads into the future, Southern wants to maintain a portfolio approach that provides for optionality in future fuel choices. Southern is currently building the first two nuclear units licensed in the U.S. in 30 years. Additionally, it is building a coal-integrated gas combined-cycle unit in Mississippi and the country’s largest biomass facility in Texas. Southern’s goal is to be able to switch based on the best prices. Future generation mix projections depend on the relative cost of gas versus coal generation. Southern presented two scenarios for 2020, one with natural gas rising to 57% of generation and another with gas falling to 34%. But even with the most favorable projection for coal, coal is at 45% of generation – well below its 2007 peak.
Numerous other companies around the U.S. are going through analyses similar to Southern’s – and often coming to similar conclusions. In addition to low gas prices, coal generation is facing the headwind of uncertain but expectedly more stringent environmental regulations (see New Environmental Rules and the Electricity Industry — Lots of Fuss or Real Impacts? ). So while gas prices have proven volatile in the past, it appears that a significant and dramatic shift in generation mix is occurring and may last for a long time.