An Energy Year in Review: Annus Horribilis or Annus Mirabilis?

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by Tanya Bodell, Energyzt

The end of the year has arrived, along with a compelling inclination to recount this year’s highlights. In 2012, the power sector experienced several notable events that serve as harbingers for the new year.

Gas Prices Hit New Lows

The industry watched in awe last winter and spring as Henry Hub gas prices plummeted to below $2 per million British thermal units. Initially unclear about whether the decline was temporary, the industry seems to have accepted that prices not seen since the 1990s might be here to stay until drilling cuts back and new demand enters. Expect continuation of announced rig reductions, increasing investment by petrochemical manufacturers, and stubbornly low gas prices.

Natural Gas, Coal-fired Generators Reach Parity

In April, natural gas and coal-fired power plants produced nearly the same amount of energy. This event represents a larger trend of coal displacement by natural gas resulting from higher coal prices because of exports and declining natural gas prices from new shale supply. For the first time, coal and natural gas generation is at parity in price and production—a temporary phenomenon until gas, coal and power markets settle into a new equilibrium. Expect continued competition at the margin between natural gas and coal-fired plants until coal plant retirements come to fruition.

Large Utility Mergers

Several utility megamergers occurred this past year. In the spring, Northeast Utilities completed its $4.17 billion takeover of NSTAR. Maryland regulators approved Exelon Corp.’s proposed $7.9 billion takeover of Constellation Energy Group. During the summer, Duke Energy Corp. and Progress Energy completed their $32 billion merger. In the fall, NRG Energy Inc. and Gen-On Energy Inc. jointly won notice from the Department of Justice and the Federal Trade Commission granting early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 for their $18 billion merger. Mergers of this magnitude are common in a maturing industry where revenue growth is challenged and the quest for high profit margins must resort to transactions. Expect to see continued acquisitions and large-scale mergers as the industry struggles with flat demand growth.

Demand-side Market Manipulation

In July, the Federal Energy Regulatory Commission (FERC) issued four orders directed toward participants in New England’s Day-Ahead Load Response Program. FERC requested a showing of why those participants should not be found to have manipulated the load response market and required to disgorge payments totaling $26.5 million. There are three precedent-setting aspects of these orders: FERC’s anti-market manipulation investigation and enforcement powers are being applied to demand response markets; the orders named two market participants, their consultant and his consulting firm, targeting those who perpetrated the action as well as those who advised them to do so; and substantial penalties are being assessed. Market participants and advisors on the demand side of energy markets beware.

A Whirlwind of Renewable Energy Activity

With federal production tax credit (PTC) and investment grants’ expiring at the end of last year, wind developers have spent most of this year frantically working to complete projects to meet the in-service date deadline of Dec. 31. Biomass and geothermal projects, which have in-service date deadlines, will see similarly frantic activity next year. In the meantime, photovoltaic solar is the new focus, with a continued investment tax credit through 2016, multiple states’ offering generous incentives, and significant cost reductions because of technological and manufacturing improvements. Unless the PTC is renewed, expect a continued renewable energy shift away from wind turbines.

No New Energy Act … Yet

The most recent Energy Policy Act was passed by Congress and signed into law by President George W. Bush on Aug. 8, 2005. Energy policy tends to be renewed approximately every five years, making the next overdue. With the courts’ overturning the EPA’s proposed cross-state air pollution regulations in August and a growing challenge to the administration’s back-door strategy of implementing carbon policy through regulatory decrees, expect the Obama administration to turn to energy matters.

For certain energy market participants, these events were awful; for others, they were wonderful. Whichever they were for you, best wishes for a prosperous new year!

Author

Tanya Bodell is executive director of Energyzt, a collaboration of energy experts intent on understanding the impacts of energy integration. Reach her at 617-416-0651 or tanya.bodell@energyzt.com.

“History teaches everything including the future.” – Lamartine

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