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Energy Management to Fuel Future Cost Containment

Current moderating energy prices are providing an opportunity for change.

April/May 06
After experiencing stunning energy price increases recently, it is hard to imagine any good news about energy rates. Surprisingly, the Energy Information Administration's Annual Energy Outlook 2006 (EIA AEO2006) does have some good news. The forecast for the following decade shows inflation-adjusted price stability across all fuels, despite increases in global energy demand, increasing energy infrastructure limitations, and the lingering effects from two hurricanes in the Gulf of Mexico. It is, however, a temporary respite, because early in the next decade energy price increases come roaring back, as demand from other countries, especially Asia, outstrips new supplies.

National Markets
The driver for energy demand is economic growth. The AEO2006 Reference Case assumes an annual U.S. GDP growth rate of 3 percent. As economic growth occurs, the demand for energy increases. Since the 1970s, however, U.S. energy intensity, the energy used per dollar of GDP, has declined; it is projected to decline further over the next 20 years as our economy shifts away from energy-intensive manufacturing and we further embrace energy efficiency in its many forms. How well we manage our energy usage in the near term will largely determine our future prices.

Oil and Natural Gas: In 2005, the demand for oil in the United States actually declined slightly but the reasons were idiosyncratic - hurricane-related reductions, airline consolidations, and warmer than normal winter temperatures - and not indicative of future consumption patterns, i.e., demand is expected to increase. Despite the introduction and discussion of fuel-efficient cars, motor gasoline demand alone is expected to increase nearly 2 percent per year.

Natural gas demand, primarily from space heating, electricity generation, and manufacturing, is expected to increase 2 percent by 2007. Over the next two decades, the United States will become the largest natural gas importer in the world, importing more gas than China and India combined. With increased demand will come rising prices. However, over the next two years, prices may not rise in response to demand increases because the warm winter of 2006 has U.S. gas storage levels at their highest in almost 20 years, putting less pressure on new production.

Domestic production of oil and gas is recovering more quickly than expected from the Gulf hurricanes according to the House committee testimony of EIA Administrator Guy Caruso. Nearly a third of domestic oil production occurs in the Gulf of Mexico. About half of the refineries that had shut completely are back producing at full capacity, and most of the refineries that had to scale back production have returned to full production capacity as well. As of December 2005, only one third of the crude oil and a fifth of the natural gas were still shut in.

New oil and gas supplies, especially from non-OPEC sources such as Canada, Mexico, and Brazil, will help stabilize prices during the next few years. Oil prices are forecast to drop back to around $60 per barrel after hovering around $65 a barrel this year. However, the pressures that drove prices over $60 per barrel are expected to intensify over the next decade, so the price respite must be considered a temporary one. The increased prices will draw out new supplies that were uneconomic to extract before. For example, Canada's oil sands could provide the United States with a stable oil supply for 40 years.

Coal: Improved mine productivity and a shift to low-cost coal in the Powder River Basin of Wyoming help stabilize coal prices even as demand for coal rises over the next decade. The increase in demand for coal, about 1.5 percent per year, will come from changing technologies in the electric-generation market, allowing coal to take market share away from natural gas for electric power generation.

Synthetic fuels can be produced from coal, and as prices rise for other fuels, coal liquefaction will become more common. Coal liquefaction is already economically feasible at current oil prices for some applications.

Electricity: Electricity prices are projected to stabilize despite forecasted demand growth of over 2 percent during the next two years. The prices for natural gas and coal, the most common fossil fuels used for electricity generation, are moderating, and these price breaks should be reflected in the cost of electricity. However, electricity prices have strong regional variations and these will continue. Currently, average electric prices range from about 8 cents/ kwh in the South to about 14 cents in the Northeast.

Although electric generation capacity is adequate in the near term, a lack of sufficient transmission lines is causing reliability problems and price increases in some areas of the country.

Regional Price Variations
Available supplies, transportation costs, and demand patterns vary by region causing different energy price patterns. Each region's energy users are focused on removing the barriers that stand in the way of reasonable prices and reliable supplies.

The Northeast: Lack of Local Supplies
The Northeast has few indigenous fossil fuels. In New England, more than 20 gas-fired electric generation units were built since 1998, and most of the gas used must be transported from outside the region. A new gas-fired plant can double the throughput on a pipeline, straining pipeline capacity that must supply enough natural gas to heat the 40 percent of Northeast homes and businesses that use it. Some electric companies see their gas supplies interrupted during the winter heating season. This can cause plant shutdowns and reductions in electric generation capability.

Energy companies have come forward with proposals to bring in more gas both through pipelines and by way of liquefied natural gas (LNG) terminals. Both proposals face siting and safety concerns, but some progress has been made. One company, Corridor Resources Inc., recently announced that it has begun the application process to construct a natural gas pipeline connecting a New Brunswick gas field with the Maritimes & Northeast Pipeline, allowing the company to supply significant volumes of natural gas to New England.

LNG is a likely future source of natural gas for the Northeast. Gas is super-cooled until it liquifies and can be transported in tankers. Once the tanker arrives at its destination, the gas is reheated in a re-gasification terminal and pumped into pipelines. It is expensive but supplies are plentiful. Currently there are five U.S. re-gasification terminals producing 2 percent of the U.S. gas supply, but all are used to capacity. However, the Federal Energy Regulatory Commission is reporting that more than 40 new terminals have been proposed.

Easing the demand for natural gas in the region would stabilize the cost of both natural gas and electricity. Conservation programs have been in place for years at many Northeast utilities. Now some utilities are encouraging customers to generate their own power, e.g., the New Jersey Clean Energy Program's (NJCEP) Customer Onsite Renewable Energy program. To participate, a customer must install an on-site solar electric, sustainable biomass, fuel cell, or wind-energy generation system. A variety of financial incentives are offered and the customer receives the added security of on-site power.

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