There has never been a more important time for companies to review the way they use and buy energy.
Over the last 24 months, natural gas has reasserted its dominance in the U.S. energy landscape. Natural gas has always been an important fuel, responsible for much of the country’s winter heating demands; however, its importance in electricity generation was less stated. Natural gas is the chosen fuel for peaker plants (those that respond to grid demand during peak usage times) because one can turn on and turn off generation units very quickly when using natural gas, especially in comparison to other fuels such as coal, nuclear, etc. A number of legislations handed down by the current administration and national agencies have created a significant increase in the demand for natural gas over the past two years, which will only continue to grow in the coming years.
Due to the Cross-State Air Pollution Rule (CSAPR) ruling and Clean Power Plan proposal, many incumbent power plants using coal as their generation fuel will no longer be able to operate in the same manner. Their choices are a) Spend millions to install emissions scrubbing infrastructure, b) Retrofit their existing plant in order to accept other fuels, or c) Shut down. Many operators are selecting option C, leading to a few consequences: 1) Electric grids are becoming more stretched, 2) Natural gas is becoming more important, and 3) Prices for electricity and natural gas become much more elastic during times of peak demand.
Simultaneously, we see demand increasing; the U.S. is currently exceeding year-over-year natural gas production by an average of about 5 percent over the last five years. New technologies (horizontal drilling, fracking, etc.) have opened up areas never before accessible to natural gas collection, fueling this boom in production. With this increase in supply, new sources of demand are present on the horizon. Once an LNG net importer, the US is currently undergoing a transformation to become a net exporter. Additionally, the aforementioned electricity generation demand and growing transportation fuel demand will consume natural gas resources.
The question is not whether natural gas is important; the question is how can my organization manage its importance and make natural gas pricing work for us?
There are a multitude of energy procurement strategies that an organization can adopt in order to protect itself from the perils of natural gas high pricing and hedge itself during periods of lower pricing. The natural gas forward pricing curve is very cyclical in nature, and throughout the year there are usually two or three periods during which natural gas hedging is very advantageous. Additionally, when securing a natural gas or power contract, a consumer can split out the various components and purchase certain components when they may be better priced.