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The Impact of Natural Gas Fracking on Prices for Electric Power

April 17, 2012

The development of extraction methods for natural gas from shale has induced a tremendous rise in the commodity’s production. As a result of its abundance, the current price of natural gas is about 2% that of oil, a historic low. However, despite the price attractiveness of gas, there are environmental concerns relating to the hydraulic fracturing of shale. Proponents contend that the “fracking” process is environmentally safe, and that exploration and production companies are diligent in using best practices to ensure that their operations are conducted responsibly. Other entities decry the use of fracking, claiming that it is a threat to the environment. In response, The White House recently announced the formation of an interagency task force to “promote sensible cost effective approaches” for the development of natural gas resources, and to also look into the economic and national security benefits of robust gas production while safeguarding the environment.

UAI does not take a position with regard to whether fracking is environmentally responsible. However, we would like to explore the implications of low natural gas prices on electric rates. The impact to date has been dramatic in those parts of the country that now rely heavily on natural gas to generate electricity (e.g., the Northeast and Texas). Wholesale power prices in New England, for example, have declined markedly since 2008, the year in which gas prices peaked. During the first three months of 2012, gas prices were roughly one-third of those in the first quarter of 2008. New England’s on-peak power prices for January-March, 2012 averaged 39% of those that prevailed during the identical period in 2008. (On-peak prices pertain to roughly one-half of the hours during a month.) Similarly, wholesale power prices in Texas declined by about 36% during the four years. Accordingly, utilities have been announcing major rate decreases that have been driven by reduced gas prices. Western Massachusetts Electric lowered business rates by 24% this month. In March, Entergy Texas implemented a rate decrease of roughly 29%. Customers of other utilities in these regions (e.g., AEP, Connecticut Light & Power, El Paso Electric, NSTAR, and Xcel Energy) can be reasonably expected to benefit from lower electric rates in the future. Also, reduced wholesale power prices have enabled suppliers in unregulated markets (e.g., Constellation, Direct Energy and Noble Americas) to offer prices for electric power that are lower than those that prevailed a few years ago.

What of utilities that are predominately coal-fired? Many are getting attuned to the prospect of increasing their use of natural gas to generate electricity. Rocky Mountain Power announced recently that it plans to convert a portion of a power plant in Wyoming to gas. This is eye-raising because Wyoming produces 40% of the nation’s coal, and its coal is renowned for being relatively low in both cost and sulfur content. Georgia Power is building three gas-fired plants to replace coal-fired units, and is considering converting power plants from coal to gas. Oklahoma Gas and Electric is using its gas plants much more extensively in order to displace power generated from coal. As a result, the utility plans to lower customer rates this summer. Assuming that gas prices remain low by historical standards, the impact of a shift away from coal will be reduced electric rates for utility customers.

It seems apparent that if natural gas fracking can clear hurdles presented by environmental concerns, the implication for electric power rates and the nation’s economic well-being will be quite positive. Fracking’s ability to boost greatly natural gas volumes stands to be the single largest factor to impact the price of electricity in the immediate future.  Large energy customers and others concerned about electricity and natural gas prices will do well to pay close attention to developments relating to fracking when they plan their upcoming energy spend.

Ken Eisdorfer 04/17/2012

Since 1986, UAI has provided energy supply management services that reduce utility costs for multi-site industrial, commercial, and governmental customers.  UAI’s core team of unbiased utility rate analysts and deregulated energy procurement experts manage over $2 billion in annualized energy spend and are focused on lowering the cost of utilities for end-use customers. UAI’s comprehensive energy cost management services include deregulated energy procurement, utility rate analysis, utility bill auditing and overall utility bill processing services that result in reduced energy costs and measurable utility savings. For more information on Utilities Analyses, Inc., visit www.utilitiesanalyses.com

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