Natural Gas interest — The 2010 sequel

Filed under: Opinion |

The current surge of interest in natural gas — fueled by innovative new extraction technologies, lower prices, and meaningful environmental benefits — has the potential to unlock huge proven reserves in our country.

But before we declare the emerging natural gas revolution a success today, we must confront a series of challenges that are rooted in history.

During the late 1990s, a number of independent power producers were aggressively planning to build new natural gas power plants. Natural gas was priced at about $2-$3 per MMBtu then, so the plans made excellent sense. Then the Enron debacle started unraveling and slowed the natural gas momentum down; after that, natural gas prices started to creep up and, when pricing hit $12-$14, virtually all natural gas power plant development stopped.

Half a decade later, we have the ability to tap into enough domestic natural gas to last us for a century. And, with prices in the $5 range, plus stringent clean fuel standards about to take hold from coast to coast, it’s only logical that natural gas takes center stage in the energy industry once again.

Will history repeat itself?

The big unknown is whether independent power producers will remember what happened in the late 1990s, and hold back. The bad psychology — and fear of another price spike — still lingers in some quarters. So this is definitely an issue that must be resolved in the independent power producers’ minds, in their risk-reward models, and on their spread sheets.

While they deliberate, utilities will start building natural gas power plants to replace environmentally outdated and outmoded coal power plants. North Carolina-based Progress Energy, for example, has plans to shut down 11 coal plants in the very near future.

Natural gas offers many advantages over coal. First, it’s cleaner and emits far less greenhouse gas. Second, it’s a steady, reliable power source that can efficiently enable intermittent renewable energy like wind and solar; indeed, a natural gas power plant can run with 90-95 percent availability 24 hours a day. Third, the cost of putting in a natural gas power plant is about one-third of the cost of building and installing a coal plant.

Ideally, independent power producers will get over their understandable jitters and help energize the natural gas movement today. But if they don’t, and if utilities start building natural gas power plants, we have to accept the fact that events will unfold more slowly, and greater patience will be required. For all their strengths — and there are many — utilities are usually constrained by government rules and regulations; as a result, they just aren’t as nimble as they’d probably like to be.

The role of capital markets

The good news, though, is that many utilities are financially solid and don’t have to depend as heavily on the capital markets, which are still holding back on credit. This means that it might be easier in a down economy for utilities to develop and bring natural gas power plants on line because they can adjust their rate base and pass the project finance costs on to their consumers.

It would be better, of course, if we could manage to stabilize natural gas prices, so that independent power producers would have an incentive to enter the market and build a new generation of natural gas power plants.

In addition to the financial and environmental benefits, constructing a new wave of natural gas power plants should boost employment, which will help offset the jobs that will be lost as utilities are forced to decommission coal plants in the coming years.

A bridge to the future

The larger point, however, is that we are currently in a complex transition period between the old and new energy economies. There is a widespread recognition — especially among environmentalists — that our fossil fuel-based past cannot continue indefinitely. At the same time, there is a growing sense that renewable fuels are the best hope for the future. In the meantime, while we’re waiting for that future to scale, take shape, and become an efficient and affordable reality, natural gas can serve as a cheap and clean alternative — a bridge to the sustainable future, if you will.

The question well worth pondering is: Who will help build that bridge — independent power producers or utilities? The answer is critical and should start to come into focus in 2010.

Trent Markell heads the Project Finance / Independent Engineering team at Harris Group Inc. He can be reached at 303-291-0355.