Wholesale electricity prices in the U.S. fell by more than half last year, driven largely by a decline of more than 50% in natural gas prices in what looks like a permanent shift in the domestic energy market, according to a recent government report.
While the economic recession and depressed demand had contributed to the lower prices, the burgeoning production of shale gas and improvements in gas infrastructure were the main reasons for the change, according to the annual state of the markets report from the Federal Energy Regulatory Commission.
“A new gas market paradigm emerged into clearer focus,” FERC said. “This paradigm may change the way we look at future energy choices.”
The decline in natural gas prices brought the fuel close to parity with coal in terms of operating costs for electricity plants, FERC said, while the widening gap with heating oil prices made gas more attractive for heating. Gas and wind-fueled plants accounted for 84% of the 25 gigawatts of new generation capacity that came on stream in 2009.
However, the drop in demand for electricity – at 4.2%, the most severe in 60 years – also played a role in depressing prices of both natural gas and electricity. It was only the third time electricity demand had fallen year-on-year in the 11 recessions since 1949, and the first time in that period that demand had fallen successively over two years, in 2008 and 2009.
New pipelines – particularly the Rockies Express Pipeline connecting Wyoming to eastern Ohio – improved distribution possibilities and helped remove regional differences in the price of gas. Added capacity of liquefied natural gas terminals in the Northeast helped reduce price volatility in that region.
“The United States is closer than ever before to being a single natural gas market with congestion limited to a few markets for a few periods during the year,” the report said.
The main difference for the year and in the long-term outlook for natural gas was in the improved technology for producing shale gas in Texas, Louisiana, Oklahoma, Arkansas and Pennsylvania. Production techniques have drastically reduced the risks in drilling and shortened the time from discovery to drilling.
“Ending long production lead times and the risk of failure or loss may dramatically temper the gas market’s systemic boom and bust cycle,” FERC said in the report.
By. Darrell Delamaide