Could Cheap Natural Gas be Bad for the Energy Industry on a Whole?

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A mix of slow economic growth coupled with ever-dwindling gas prices could start to put pressure on US energy companies to reconsider more costly coal and nuclear projects.

Cast your minds back to the mid 2000’s when natural gas prices soared causing dependence onto other energy sources. Now we are witnessing a reversal situation, with looming repair and upgrade costs for nuclear and growing cost of environment compliance for coal plants as natural gas shows all time low prices. See below (Figure 1) a graph produced by ZEMA regarding natural gas prices from 2005 to 2013.

Figure 1: Natural Gas Prompt Price from 2005-2013 (Graph produced by ZEMA)

According to Bloomberg, it costs a gas plant just US$90.42 per megawatt-hour to produce energy, whilst a coal-fired plant costs upwards of US$140.13 per megawatt-hour.

A recent industry example of a US firm, Duke Energy – who earlier this month announced plans to close their Florida Crystal River nuclear plant after repairs to the plant were deemed too costly – could be an example of things to come.  Duke’s announcement to close this plant has already opened up speculation that at least another four US reactors could be at risk of the same fate.

In addition to this, Duke has decided to close two coal-burning plants 2 years earlier than originally planned, a decision the Wall Street Journal says was made due to rising costs of environmental compliance.

In their announcement, Duke states these closures are part on their plan to concentrate on expanding their presence in the natural gas industry. They are currently looking for sites around Florida to potentially build a natural gas-fueled plant.

Florida is a state that already relies on gas for two-thirds of its energy generation. If Duke follows through with their plan to replace these plants with natural gas-fueled plants, Florida’s dependence on natural gas would rise to more than 70 percent.

Decisions like these ones may be a cause for concern. The shift to one particular energy source could be counterproductive for players in the sector. Having a balanced reliance on various sources ensures a more stable environment for power utilities. But this is a whole different issue altogether…

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