Henry Hub: Gas prices spike to $8
The February 20th edition of the EIA Henry Hub spot price graph debunks the notion of imminently stable gas prices that ANGA CEO, Marty Durbin put forward in a blog post and video last week. The impact of the extreme cold temperatures that much of North America has experienced over the past several weeks has caused Henry Hub natural gas spot rates to spike up to almost $8/MMBtu in some areas and then settle out today at just below $6/mmbtu. At $8/mmbtu, we’re seeing an approximately 400% price swing in an 18 month period. (These prices were published in the February 20th edition of the EIA’s Henry Hub spot price graph)
In his blog post, Durbin argued,
The “soaring” prices referenced by the media (and competing energy sources) remain in the low $5/mmbtu range. That’s compared to prices in the pre-shale era that hit $10 during the extreme winter of 2000-2001 and $13 during the 2008 hurricane season. And, at wholesale prices of $5.50/mmbtu, natural gas continues to offer the lowest levelized cost of electricity among all energy sources.
Durbin does state that price spikes are not caused by supply issues, so much as they are caused by infrastructure issues. Fair enough, but even if we conditionally grant him that point, to the end user, $8/mmbtu price spikes are still $8/mmbtu. To a senior citizen on a fixed income, it doesn’t matter if $8/mmbtu is caused by lack of supply or lack of pipeline capacity; they’re still paying for increased energy prices.
Of course, I am not arguing that we should stop using natural gas; far from it. Natural gas is an extremely valuable and much needed sector in our overall energy supply. However, despite Durbin’s strenuous protests, we are once again encountering $8/mmbtu prices and 400% price swings in natural gas. That fact should cause all electricity users to pause and question whether it is a good plan to force the closure of over 60 GW of coal-fueled capacity when we are replacing it with natural gas and (even more expensive and ephemeral) renewables. Electricity users need to remember that coal provides 40% of US electricity at steam coal spot rates of as low as $0.55/mmbtu. Even the “expensive” steam coals have spot rates of well below $3/mmbtu according to this Jan, 2014 EIA data.
Electricity users should also remember that during this recent cold spell, large utilities like AEP relied heavily on … No, they NEEDED to use as much as 89% of the coal-fueled assets that they have targeted for closure as a result of extreme environmental regulations and competition from other fuel sources. Energy users should also remember that AEP needed that capacity precisely because of the strictures on gas delivery that Marty Durbin brushed off in his quote above. While natural gas flows on an “as needed” basis, coal is delivered early and stored in piles representing as much as 30 or more days of normal use.
When natural gas shuts off, the utilities MUST turn to coal to supply the electricity that kept people warm and safe despite the impact of the polar vortex.
I’ll close out with a quote from Nicholas Akins, CEO of AEP from a January 27, 2014 AEP Q4 2013 earnings call that demonstrates the dangerous and short-sighted game being played with our electrical system.
Just as an aside, to quickly remark on the capacity markets and recent experience with the polar vortex, it is interesting to note that while daily gas prices are in the $5 to $6 per MBtu range and energy prices are soaring well beyond that, supported by gas price increases alone, it is clearly evident the capacity rents are being reflected in energy prices, indicating a need for further reform of capacity markets.
Looking at the physical side. When 89% of our coal capacity slated for retirement in mid 2015 is called upon and running, natural gas delivery is challenged and voltage and load reductions are occurring is another reminder that we should carefully plan and design this social safety net we call the electric grid to meet extreme requirements, not just steady-state conditions. We believe the nexus of EPA initiatives energy market development and security threats, whether physical or cyber, is a national security issue.