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Low U.S. natural gas prices have forced power prices lower, changing the landscape for U.S. utilities and causing industry insiders to worry whether there will be enough electricity to meet demand as the economy recovers.
Natural gas prices have been falling since last summer amid a production boom and relatively weak demand. But prices dropped to 10-year lows in January and have stayed there, as mild winter weather has cut heating demand, creating a record surplus.
The low prices are good news for companies that sell power to retail customers. But they're terrible for power-plant operators who sell electricity on the wholesale market. While prices remain low, power plant operators are focusing on sales to end-use customers, which are more profitable. They're also putting plans for new power plants on hold, which could lead to electricity shortages in Texas and other regions in the next few years, executives at power companies have warned.
"The supply being driven by the natural gas industry is sort of driving the natural gas industry off a cliff and it's taking the electrical industry with it," David Crane, chief executive of power generator NRG Energy Inc. (NRG) said last week on the sidelines of a conference in Washington.
New federal limits on emissions from power plants will cut power supplies even further, as companies like American Electric Power Co. (AEP) plan to shut down older coal-fired power plants over the next few years, said Nick Akins, AEP's chief executive.
"If the economy comes back the way it was before, [and] at the same time requirements are occurring relative to [federal] requirements, that could further exacerbate the situation, you could wind up with a very serious situation," Akins said Friday on the sidelines of a meeting in New York.
Akins proposed that grid operators, like the PJM Interconnection in the Mid-Atlantic, should consider offering incentives to developers to build new power plants, and that federal regulators should be flexible in implementing the environmental rules.
Natural gas futures in New York have been trading around $2.50 a million British thermal units, reaching levels not seen since February 2002. Electricity prices in the busy Mid-Atlantic region have fallen by about a quarter from a year ago, to about $33.45 a megawatt-hour for March power deliveries, according to Amerex Brokers.
A unit of AES Corp. (AES) that owns four coal-fired power plants in New York state filed for bankruptcy in January, blaming falling power prices and high costs. Other companies, like Exelon Corp. (EXC), are scaling back spending on their wholesale power plants while they look for revenue and profit from their utilities and other retail sales.
"The [profit] margin, if you go all the way to the retail customer, is somewhat larger than it is just selling into the wholesale market," Exelon Chief Executive John Rowe said last month during a conference call with analysts.
Exelon plans to buy Constellation Energy Group Inc. (CEG) in a deal valued at nearly $8 billion. Constellation owns a Baltimore utility and a growing retail electricity business in the Mid-Atlantic and Texas.
Meanwhile, analysts are predicting that natural gas prices will remain low this year and next, as gas demand slowly catches up with supply.
"We're having a tough time finding a home for all the supply," said Michael Zenker, an analyst at Barclays Capital. The bank earlier this month cut its forecast for 2012 natural gas prices by 20% to $3.05 a million Btu and cut its 2013 gas price prediction by 14% to $3.70 a million Btu.
Some gas producers like Chesapeake Energy Corp. (CHK) have announced plans to cut production. But Zenker and other analysts are skeptical that it will be enough to boost prices.
After U.S. gas production in 2011 grew at a faster rate than demand, production and demand are likely to grow at roughly the same pace, about 2% in 2012 and roughly 1.5% in 2013, according to a forecast this month by the U.S. Energy Information Administration.
-By Cassandra Sweet and Ryan Tracy, Dow Jones Newswires; 415-439-6468; email@example.com