Capstone Energy Services


Increasing Electricity Cost Risks

March 21st, 2012

OMAHA (Capstone Energy Services) – Wholesale power prices maintain a high correlation to the price of natural gas. Over the last four years, natural gas and wholesale power prices have both experienced dramatic declines. Since 2008, natural gas prices have dropped from over $8.00 per MMbtu to $2.25-$2.75 per MMbtu. In the same period, wholesale power prices, on the MISO (Midwest) system for example, have dropped from $52 per MWh to $26 per MWh. While these declines have been significant, the actual retail power cost to industrial customers, according to the U.S. Energy Information Agency (EIA), has not changed. Average U.S. Industrial power costs in 2008 were $68.30 per MWh and in 2011 $68.90 per MWh. Long term fuel supply contracts and increases in other non-fuel costs are two of many reasons that retail prices have not reflected the decline in wholesale power costs.

Stable consumer prices at the same time wholesale power prices declined to historical lows will leave industrial consumers vulnerable to future fuel cost increases. It is not expected that wholesale prices can fall much more, yet a number of power related initiatives, both at the state and federal level, are generating incremental costs that will need to be absorbed into power rates. These include, in part:

• Transmission and distribution system upgrades and expansions
• “Smart Grid” and “Smart Meter” system installation and operation
• Integration and costs of expanded renewable energy capability
• EPA regulatory compliance
• Conservation programs

While the intent is for enhanced conservation to offset some of these cost increases, the actual kWh cost to consumers will most likely rise.

Of greater concern is the risk of much higher utility generation costs. Over the last four years, fuel cost have been falling, masking other cost increases. Now these costs are at historic lows. In addition, EPA regulations are resulting in numerous low cost coal-fired plant closures to be replaced by generation capability using higher cost natural gas and renewable resources. During the next four years, according to EIA reports, the planned 52,152 MW expansion of generation capability will be heavily weighted toward natural gas (51%) and renewable energy generation (34%).

While natural gas prices are at historical lows, numerous initiatives in place will increase demand: power generation, vehicle fuel, new steel and fertilizer plants and exports. At the same time, reduced production due to low prices, hydraulic fracturing restrictions and new infrastructure requirements will limit supplies. The result will be much higher prices for natural gas in the years to come and also for electricity as these gas cost increases are passed through.


By Ed Freeman

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Energy Facts

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