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Archive for September, 2012

Barron’s reports that Brazil’s president and energy minister are going to order utilities to cut their rates by up to 28% in order to boost economic growth and tame inflation. (Barron’s, 9/17/2012, Charting the Market, pg. M2, Energ Minas Gerais).  They must not worry terribly much about the process of setting rates down there.

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Electricity market prices have been low for a number of reasons, but now they’re really starting to bump up (or maybe bump down) against the cost of production. Today’s opening wholesale forward fixed price supply reflects the steep downward slope since the $65/megawatt-hour range of June 2008 (in dollars per megawatt-hour):

  • 2012 — 26.52
  • 2013 — 29.96
  • 2014 — 31.12
  • 2015 — 32.09
  • 2016 — 33.79

Mind, these are wholesale prices, not the prices that a customer in a competitively declared class would get from a supplier. Generators like Exelon Generation get their profit out of the difference between these prices and their cost of production, which is in the neighborhood of $20/MWh. One can legitimately ask how much lower they can go because there isn’t that much room left. If this market had a theme song, it would have to be Chubby Checkers singing Limbo Rock (“How low can you go?”).

For any nonresidential customer that hasn’t locked in a long-term electricity supply contract, now is the time to act. Even if a company’s current contract still has a year or two left to run, they should be looking at either a new contract that will pick up when the current contract ends, or an amended “blend & extend” deal with their current supplier. Plus, the period around September, October and maybe the first part of November are shoulder months for the electricity market, meaning that the summer peak demand season has passed, but the winter space heating season hasn’t kicked in yet.  Prices traditionally trend lower during these months, so it’s a good time to get those shoulders under the limbo stick.

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There have been predictions, though some might call them exhortations, that the United States will become a major exporter of natural gas by the end of this decade.

Predictions are always dangerous, especially when they concern the future, but this one has some plausibility. Domestic natural gas prices are around $3/mmBtus. Europe pays about $15 and Japan imports LNG at about $17. Sounds like an opportunity for profit, but the Wall Street Journal’s Liam Denning puts a pin in that balloon.

First you have to turn the natural gas into a liquid before you can put it into a tanker, and domestic port facilities won’t be ready until 2015. Losses in this process at about 15%, which raises the cost to $3.45/mmBtus. The liquefaction process itself costs another $3, and shipping can range from $.85 for Europe to $2.80 for Asia. Converting the liquid back to gas when it arrives at its destination adds another $.40. At current natural gas prices, the delivered cost of U.S. LNG would range from $7.70 for Europe to $9.70 for Asia. So far, so good, based on current prices.

Long-term projections for natural gas prices are about $6/mmBtus for 2016 and later. That brings our delivered U.S. LNG prices to $11.15 – Europe and $13.15 – Asia. Denning then takes the rule of thumb that associated gas in Europe runs about 12% of the Brent crude benchmark, while in Asia it’s about 15%. With Brent at $100, delivered U.S. LNG is moderately competitive. But if we push natural gas up to $7 and the Brent down to $90,  U.S. LNG ($12.30 – Europe and $14.30 – Asia) is no longer competitive ($10.80 – Europe and $13.50 Asia).

Prospective exporters should also consider the Putin Factor. The Russian Bear can sell to either Europe or Asia, and Putin and Noda are already at work on a deal to build an LNG terminal at Vladivostok by 2018. They also have even more ambitious plans to build a pipeline under the Sea of Japan. You can bet that Vladimir will undercut any price for US LNG in either market for as long as it takes to wipe out the competition. It would be a mistake to expect less from Vladimir Putin than one might have expected from John D. Rockefeller back in the day.

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