Will Electric Power Cause the Next Price Shock?

There was recently an interesting, albeit somewhat disturbing article at Platts discussing something many of us don't want to admit that we know is coming - higher electricity prices.

I know, electricity prices are already high for many of you, along with just about everything else. I am not talking about those high prices, I am talking about the really high ones that are just around the corner. The ones that will result from higher commodity prices, which only seem to keep going higher. The ones that will continue to result from the lack of a coherent energy policy. The ones that result from environmental legislation, which if not carefully considered (no matter how good intentions), may have the ability along with higher commodity prices to bring the power system to its knees. The ones that unlike higher gasoline prices, which are high but still can be paid to purchase the commodity, may not even give us the opportunity to pay higher prices to receive services during a blackout. Yes, those are the ones I am talking about.

According to the Energy Information Administration [EIA], 49.0% of electricity is generated from coal, 20.0% from natural gas, 19.4% from nuclear, 7% from hydro, 1.6% from petroleum, with the remaining 3.1% from other sources, part of which are alternative energy sources not listed (solar, wind, etc.). Approximately 9.5% of electricity generation is currently from renewable sources. If Congress has its way, this number will increase as restrictions on carbon emissions get enacted.

While everyone would like to see lower carbon emissions and a cleaner environment, such legislation will have consequences, many of which will be unintended (ethanol anyone?). Hopefully some of these consequences will be considered as we move forward as a country toward developing some type of energy policy, because while we all know about the high cost of gasoline, and the impact that burning this fuel has on our environment, we are also beginning to feel the effects of ethanol mandates, which even with their good intentions are producing unintended consequences of higher food and commodity costs. Unfortunately, electricity prices are the next form of energy that is likely to feel the effects of high commodity prices, regulation, and legislation in a way that is similar to the current impact of high crude oil prices.

Edison Electric Institute expects U.S. consumption to grow by 30% by 2030. Currently, the average U.S. household uses 21% more electricity than it did in 1978, and household consumption is expected to grow by 11% more over the next 20 years as home computer and air conditioning usage continues to rise. To support expected increased usage, infrastructure will also need to be improved, but it too is not keeping up. Desire and action are not enough. Even if we begin today to upgrade the power system infrastructure, it will not come cheap. Infrastructure costs are also going up as both copper and steel prices have been on the rise, affecting towers, transmission lines, and transformer cost. Yet demand will not wait as we hope for lower commodity costs in the future. The North American Electric Reliability Corporation expects peak demand to increase by 18% over the next 10 years, while committed resources are expected to only increase by 8.5%. Not only are services in doubt, but reliability is in jeopardy.

But it potentially gets worse. Congress and both of the presidential candidates are taking about instituting some form of cap-and-trade of carbon emissions (see a previous post for some of the lessons learned from cap-and-trade). The Regional Greenhouse Gas Initiative program begins next year in ten eastern states that already have cap-and-trade rules in place, although some business and governments are already getting nervous and beginning to place ceilings on the RGGI imposed allowance costs - on the order of a $2/allowance cap. Without ceilings, some estimate the RGGI would add up to $120 million per year to electricity rates.

Congress is also considering the Lieberman-Warner Climate Security Act of 2007 for regulating greenhouse gas emissions through market-based solutions. While market-based solutions sound better than regulation to some, the Energy Information Administration is expecting the legislation to add between $30-325 per year per household by 2020 if enacted into law, with costs growing over time. The EIA forecast GDP losses from $444-1,308 billion over the 2009 to 2030 time period.

Fortunately, the U.S. has an abundance of coal, but increases in environmental regulations will prevent it from rising above its current 49% generation use levels, and this number is likely to decrease as companies continue to stop building coal-fired generation, and instead switch to cleaner burning fuels. Even if coal were to be used, coal prices are also going up - doubling over the last year as demand from China and across the globe increases. Alternatives sources such as wind power are increasing, but it is still insignificant, hydro has been decreasing, and nuclear power, even if approved and scaled to the level needed (a big "if") is at least 10 years away from receiving the necessary approvals, components, and build-time necessary to get it on-line. The cost to build and fuel nuclear plants is also not getting any cheaper.

That leaves natural gas, which has been reaching new highs over the last year and does not look to pull back anytime soon. Given that natural gas powered generation sets the marginal prices of electricity in much of the U.S., and that natural gas prices are increasing, it does not take much deductive logic to know that is going to happen to electric power prices. As carbon constraints are imposed, natural gas-fired generation, which is often used for peak generation, will now increasingly be used for normal capacity generation. Yet, as mentioned in a recent post, domestic LNG stockpiles are falling as shipments of LNG to the U.S. are instead going to Spain and Japan given the willingness of these countries to pay higher prices. Furthermore, if you consider that crude oil has at times traded with a 6-8 multiple to natural gas (see post), and you expect crude oil prices to either rise or not correct much from their current levels, then natural gas is likely to continue to rise from its current price.

And of course, all of this says nothing of the expected increase in hybrids and electric cars, or other green vehicles expected to run on hydrogen (which requires electricity to separate the hydrogen), or even run on natural gas itself. Each will facilitate an increase in natural gas and electricity prices. So in short, if you though that the inconvenience of not being able to take your normal Sunday drive or extra trip to Grandma's house was painful, you may experience even greater stress on your wallet as electricity prices begin responding to current commodity prices. When consumers have to cut back on air conditioning, reduce lighting, realize that their hybrids are not quite as economical as they thought, suffer planned brownouts, or even worse, an unplanned blackout, then Congress will begin to see the you know what hit the fan - assuming of course that there is any inexpensive electricity around to actually power the fan.

Comments

[fatcat]

If the power companies were not regulated,you would have already seen runaway pricing.I just don't know how much more the consumer can take...If this continues,worldwide depression can't be far behind,IMO.

[pachanguero]

One big error in your logic. Once people find out that the politicos are going to raise their energy bills by going green they will tell the greens to pound sand. Congress ran from cap and trade and did not even bring it up for a vote a few weeks ago,

The rules have changed now with 150 oil.

The greens who have destroyed this country are finished. We cannot afford their religion or their lies.

Global warming is a scam.

[about_time]

A) DOE says wind can generate 20%+ of our power within 15 years - without subsidies. I would not consider that a drop in the bucket.
B) A temporary price shock that causes people to conserve is a blessing. It's all about sustainability and responsibility both of which Americans have been stubbornly ignorant of for much too long.

[tntgators]

FREE MARKET FREEEEEEEEEEE MARKET FREEEEEEEEE MARKET

KEEP CONGRESS OUT OF THIS.

NOW THAT ENERGY IS EXPENSIVE, FREE ENTERPRISE HAS INCENTIVE TO DEVELOP NEW TECHNOLOGIES. YES I KNOW IT'S PAINFUL SHORT TERM, BUT PAIN IS WHAT CAUSES CHANGE.
MANY MANY SCIENTISTS BELIEVE GLOBAL WARMING IS A SHAM, BUT SINCE ROCK STAR AL GORE IS NOT THEIR CHEER LEADER WE DON'T HEAR FROM THEM. CAP AND TRADE WILL DESTROY ECONOMIES FOR YEARS TO COME WITH NOOOOOO BENEFITS.

[mcadoo3312]

Good article.

[CTProgrammer]

This article is amazing. It goes on and on about how prices are going to get higher for electricity due to a bunch of factors. Of course it will. But that is what drives innovation --- higher costs. 20 years ago solar technology was completely a loser's game. It cost more than traditional energy. Today, with subsidies, it is close to parity. Tomorrow, when the technology has had time to progress more and its in mass production, it will be cheaper. I'm no tree-hugger, but "cheap" coal ignores many deferred costs that are actual in nature, just defered. Even without legislation in effect, power companies have been cutting back or canceling coal plants. That is an economic decision, regardless of what the current administration's energy policy (or lack thereof) is. The trend away from carbon energy toward renewable and cleaner energy IS THE MARKET. Look at cars. Back when gas got relatively expensive they started coming out with more fuel efficient cars. Then gas got cheap and everyone bought SUV's. Now gas is expensive again and Toyota can't make enough Priuses. Everything in this article is accurate, but it completely ignores innovation and the impetus for technological advancement: cost. You guys all think congress amounts to more than a hill of beans where all this is concerned. The world is much bigger than just the U.S., and this stuff is all coming whether you agree with it or not.

[Ozarker]

There is a new coal fired power plant being built in Springfield, Mo. and the local utility is experimenting with Carbon Dioxide Sequestration, as in burying it 2000 feet underground, in anticipation of new federal government regulations. They don't know if it will work and if so how much it will cost. It seems possible that Natural Gas, with all the new drilling going on in all the new Shale plays, will end up being the most economically priced, abundant, clean burning fuel available. Estimates vary, but we will have enough for between 60 and 200 years. For vehicles, it costs about a third what gasoline does and in some cities what comes out of the exhaust is cleaner than the air the car took in to burn. Its the only thing that makes any sense for vehicles, especially for people that have to have a truck, van or SUV to tow or haul. Fuelmaker company out of Canada makes a Natural Gas Compressor that fits on your garage wall and fills your car up overnight. Honda makes production Civic NGV that runs on natural gas, otherwise you would have to have your vehicle converted.

[echotoall]

I do agree, electricity generating commodities are still a good play, but...

1. You are completely discounting the effecient use of the grid via smartgrid tech/software.

2. Wind and Solar will be continuous power sources. The highest cost here is the cap ex needed to build them. And if solar is truly decentralized, then house holds/cars can pump power into the grid. (generating credits/money)

(i can go on and on about the positives, but i'll stop it at the most obvious and relevant.)

The one thing i will say, even though i disagree somewhat with your economics, your article inadvertantly highlights the massive importance of the powr grid going forward.

[PeterSterling]

Fabulous article.

there's tons of natural gas here in the US to be used for power.
See; www.strategicnine.com/...

[David Enke]

I made mention in the article that ".... business and governments are already getting nervous and beginning to place ceilings on the RGGI imposed allowance costs - on the order of a $2/allowance cap." This was corrected at bullbeattrader.com, but not here. The Business & Industry Association is pushing to get the caps included, but they are not yet in place as originally written.

[aquaculture]

The august 2003 blackout in the U.S. and parts of Canada cost at least $10 billion in lost economic activity. And that is just one single event. Watch again this summer as a lot of businesses and org's will reduce operations, or shut down.
An underestimated additional benefit of solar panels is that they reduce transmission congestion, offset PEAK-loads, reduce the need for storage and/or additional powerplants operating at low capacity utilization, preventing blackouts and brownouts in hot summer months.

[jse17]

"MANY MANY SCIENTISTS BELIEVE GLOBAL WARMING IS A SHAM"

Provide 3-names and their CVs for review!

[nScout]

to jse17: just go and watch video.google.fr/videos...

Human cause of global warming is a scam indeed for more taxes and juicy carbon credits trading.

[User 125446]

There is no such thing as Congress getting it right or even close to right. The word loser was invented to describe those vassals of the enviro loonies.They will not be happy until gasoline is $ 10.00 a gallon or more.

[Hooligan1]

ABOVE ALL keep the government out of determining a solution. They have the unique ability to convert a recession into a depression.