NEWS

July 13, 2007

Energy experts see no drop in electricity, natural gas prices

DENVER, CO – Nothing short of an economic recession will lower the price of electricity and natural gas in the foreseeable future, according to energy market experts at E3 Consulting LLC in Englewood.

"We don't see anything that's trending down and keeping a healthy economy," said E3 CEO Don Hurd. "There are things that could drop it [prices], but the economy will feel it."

The consulting firm works with financial institutions and banks considering loans to or investments in big energy projects, ranging from $150 million to $1 billion. Many of the projects E3 looks at generate electricity from coal or natural gas, and as such the company closely follows shifts in markets and public policy that could affect a project's economics.

E3 sees two big factors driving its expectation for higher prices:

• Public-policy desires to keep some caches of natural gas off limits, either in offshore areas or in the Rocky Mountain West.
• A belief that stopping power plants in the United States from emitting carbon dioxide gases when they burn coal or natural gas will stop or slow global warming. CO2 is believed to be linked to a warming climate.

"There's definitely going to be upward pressure on electricity prices," said Jim Short, a senior vice president and E3's chief operating officer.

Both Hurd and Short say they recognize the goal of cleaner air, but say their clients and the public need to know what it will cost to reach that goal. And they say there should be a clear line between actions taken and results on a global scale.

"It's hard to pin down what's the cause [of global warming]," Short said. "They say it's a problem, and we're focusing on the energy made from fossil fuels. Electric production in the U.S. accounts for about 6 percent of fossil fuels burned worldwide, and that will not have an impact on CO2 emissions globally."

Short figures the typical U.S. power plant that generates 100 megawatts of power, enough to support 100,000 homes, produces 800,000 tons a year of carbon dioxide. Capturing 100 percent of that CO2 costs an estimated $50 to $150 per ton, and ultimately adds 5 cents to 15 cents to the price of every kilowatt used every hour of every day, he said.

In Colorado, Xcel Energy Inc., the state's largest utility with 1.3 million electricity customers, charges customers between 4.5 cents per kilowatt hour for huge users and 8.5 cents for residential customers.

Nationally, the range is 4 cents to 15 cents per kilowatt hour, Short said.

Add the cost of capturing CO2 to those rates, and bills can easily double -- if not go even higher, he said.

Households will pay for it directly, just to keep the lights on at home, but they'll also pay for it through the higher cost of goods and services that need electricity for production, Short said.

"The people on the nurse's salary, on a teacher's salary -- can they afford to see their electric bill double?" Short said.

Hurd said he also expects electricity prices to be driven higher by rising prices for natural gas, another fuel used to generate electricity.

Not only is the oil and gas industry having to spend more money to drill deeper into areas harder to access, such as the Rocky Mountain West, to reach natural gas, but the commodities used to build the needed drilling rigs–such as steel–are also rising in price, he said.

Liquid natural gas, which is natural gas that's been compressed to a point where it can be bottled in an ocean-going tanker and shipped around the world, has been touted as one source of new supply that could bring natural gas prices down in the U.S. But Hurd doesn't think so.

Not only are the proposed LNG processing plants in the U.S. behind schedule, but a tanker loaded with LNG steers to the buyer offering the most money, he said.

"China is a growing economy and has lots of cash. They can outbid us," Hurd said.

Hurd foresees natural gas prices consistently above $5 per thousand cubic feet in the future.

For the first six months of the year, natural gas prices on the New York Mercantile Exchange hovered in the $7-to-$8 range for a thousand cubic feet, and other economists are predicting prices in the double digits by the end of the decade.

But Hurd and Short also foresee policy changes–down the road–in response to higher energy prices.

"Once we see that high energy prices have an effect on the economy, then things will change," Hurd said. "At the consumer-driven point, as soon as the economy starts to sense that dollars are being spent on energy and not on goods, consumer confidence drops and Congress will act–and we'll take those areas that we've held sacred off the table.

"It will be a tough political battle."