For more than a year, I have said that the gas glut has slashed wholesale electricity prices and, on January 17th, in an article that is worth reading, Bloomberg News joins my chorus. It reports: "A shale-driven glut of natural gas has cut electricity prices for the U.S. power industry by 50 per cent and reduced investment in costlier sources of energy." .
The Bloomberg piece notes that the PJM West Hub (think western Pennsylvania) price averaged the equivalent of 8.7 cents per kilowatt-hour in the first quarter of 2008 and 3.9 cents per kilowatt-hour in the 4th quarter of 2011. It further states that new coal plants, new nuclear capacity, and new wind have all been cancelled due to the low power prices caused by the "shale-driven glut of natural gas."
Here are a few quibbles with a generally good piece that is actually overdue. First, the peak in wholesale electricity prices was the summer of 2008, when gas reached $13 for a thousand cubic feet, and not the first quarter of 2008 that the article uses as the comparison point. The wholesale electricity price decline from the summer 2008 peak is more than 60%.
Second, while the article does focus on the negative impact of low-power prices on electricity generation companies, it does not adequately describe the large savings for electricity consumers. A typical Pennsylvania residential electricity consumer using 9,000 kilowatt-hours would be paying today about 5 cents per kilowatt-hour more, or $450 per year, if power prices were at their 2008 peaks. Shale gas has slashed power and natural gas bills, saving households who use gas for heat approximately a combined $1,000 per year.
Third, low power prices driven by shale gas are increasing natural gas generation and have caused the cancellation of new coal and nuclear plants and the retirement of existing old coal plants. The piece, however, fails to note that the wind industry doubled its generation capacity from 25,000 to 50,000 megawatts from 2008 to 2011 and may have a record year for building new wind capacity in 2012.
While the current unsustainably low power prices are an obstacle for all new generation, including wind as well as gas plants, the major threat to new wind farms in 2013 is the expiration of the production tax credit at the end of 2012 and uncertainty about its renewal.
Lastly, Bloomberg notes that the cost of a new natural gas plant in the third quarter of 2011 is the equivalent of 6.2 cents per kilowatt-hour but does not point out that current power prices of 3.9 cents would not support construction of a gas plant. When power prices are below the cost of the lowest-cost new source of generation, they are not sustainable and will rise.
For consumers, that means now is a great time to get a long-term electricity contract to lock in low power prices made possible by shale-driven gas glut.