World energy demand is exploding and the U.S. is no longer driving consumption and price. For instance, the U.S. could double the fuel efficiencies in all its cars and the amount of world oil consumption would continue to rise, says Michael W. Wise, co-chair of the Energy Practice Group with McDonald Hopkins LLC.
“Advocates exist for coal, gas, nuclear, wind, solar and many other sources of power, but the reality is that we will need all these energy sources,” Wise says. “Every year has brought new technology, changing economics and dynamic opportunities. For example, Northeast Ohio is in the running to build the first offshore wind project in North America.”
Smart Business spoke with Wise about how energy projects are driving the economy.
What is the biggest change in the energy landscape over the last five years?
Abundant cheap natural gas -— the source of this gas is in shale formations buried deep in the earth. Historically, this source of gas represented less than two percent of the total production in the United States. Today, the production percentage is approaching 30 percent. A few years ago, gigantic port terminals were being constructed and planned in order to import liquefied natural gas (LNG). Today, those terminals are being reconstructed to export that LNG.
Texas has led this effort with its Barnett Shale reservoir, which may be the largest reservoir in the United States. However, the eastern U.S. (including Pennsylvania and eastern Ohio) is now developing the Marcellus Shale reservoir and Ohio has begun to see abundant activity in its Utica Shale reservoir.
Cheap natural gas benefits our economy as it drives down the price of electricity. Old coal plants are being retired and in some cases converted to natural gas. Both these conversions and new gas-fired generation utilize more efficient turbines to provide cheaper electricity. Cheap natural gas also provides a cost break to homeowners who heat with gas and a break for large industrials that rely on gas as a component of their manufacturing.
Finally, the drilling and distribution of natural gas is revitalizing the economies of a number of states. In particular, Texas, Louisiana, Pennsylvania and Ohio are already experiencing transformational wealth accumulations.
Are there other unique ways that Ohio is positioned to capitalize on this development?
Yes, in the use of natural gas as a preferred transportation fuel. Large vehicles and some fleets have used compressed natural gas (CNG) and liquefied natural gas (LNG) as a fuel source for decades — but on a limited basis because of the volatility of pricing. With supply appearing firm for the foreseeable future, efforts are full speed to develop the CNG/ LNG potential. Just recently, GE and Chesapeake Energy announced plans to develop CNG fueling infrastructure. The utilities (Dominion and Columbia), gas marketers (IGS) and auto OEMs (Ford, Honda and Chrysler) are also active. Government is also addressing the issue as Governor John Kasich is working with the Ohio General Assembly on a series of incentives and Congress is considering adding CNG provisions to the Federal Highway Bill.
Ohio is at the crossroads of the CNG play because of the Utica and Marcellus Shale along with the existing auto supply chain infrastructure. No other state may be better able to take economic advantage of this opportunity.
What is an under-discussed component for developing a project?
For an electricity generation project, the basics have always included site control and site-related issues along with an adequate offtake or power purchase agreement. Today, many projects must also undergo sophisticated financial engineering in order to achieve financial viability. New projects often do not have adequate returns to proceed. A byproduct of cheap natural gas is a decrease in the price of base load electricity, and more expensive renewables and advanced energies like waste heat recovery and cogeneration become comparably more expensive. In a nutshell, how does $.08 power from a cogeneration project at a steel mill compete with $.05 power from a utility? Couple this with the increasing complexity of government incentives and you have a need for sophisticated professionals. Good counsel and financial advisers can help bring a project to fruition by taking advantage of tax equity, retail power pricing, complex capital leases, state and federal incentives and favorable treatment from a utility.
What is another new variable for developing energy projects in 2012?
The Investment Tax Credit has been a strong tool to finance renewable energy projects. From 2009 until the end of 2011, that program was a real game changer as a developer could choose to take a 30 percent cash grant in lieu of the credit. This allowed projects to move forward without a partner with the requisite tax appetite. With the expiration of the grant opportunity, there is once again the necessity of a tax appetite partner. This will put a premium on sophisticated financial engineering of these projects.
What is ‘hot’ in 2012?
New and converted gas fired generation. The utilities are moving into this space but a less-told story is that other types of companies are pursuing both cogen and independent power production. The goals are to take advantage of low natural gas prices, provide a long-term hedge against the return of higher electricity prices, and to also (where appropriate) provide for the steam needs of a facility.
Who is developing projects in 2012?
Homeowners are pursuing small solar and geothermal, companies are exploring wind and cogen and utilities are developing new gas fired plants and smaller renewable projects to meet their obligations under Ohio’s renewable portfolio standard. In short, anyone.
Michael W. Wise is the co-chair of the Energy Practice Group with McDonald Hopkins LLC. Reach him at (216) 430-2034 or firstname.lastname@example.org.
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Are we entering a golden age of gas? The International Energy Agency seems to think so, citing the environmental qualities, ease of use and competitive prices of natural gas in a recent report.
New technology is creating plant efficiencies and the evolution of shale harvesting is increasing supply and reducing transportation costs, says Terry Crupi, director of Natural Gas Marketing and Trading for PPL EnergyPlus.
“Natural gas is increasing its prominence in the U.S. energy landscape,” says Crupi. “And Pennsylvania executives have an added advantage, because the region offers a straightforward platform for choosing a provider and managing energy costs.”
Smart Business spoke with Crupi about the evolution of natural gas and what it means for Pennsylvania business.
How is natural gas evolving to meet rising energy demands?
Traditionally, natural gas served as a home-heating fuel and feedstock for the industrial manufacturing sector, which caused demand to soar during colder months in northern regions of the country and highly industrialized cities. By the early 2000s, there was a dramatic surge in the construction of gas-fired power generation facilities, many of which use modern, fuel-efficient, combined-cycle technology. As a result, power grids rely on gas-fired power plants nearly as much as traditional baseload generation facilities fueled by nuclear fission and coal.
This dramatic increase in demand for natural gas has altered consumption and changed the way gas is used by region and season. Although summer demand used to be driven by the need to fill storage caverns for peak winter months, peak flow conditions along the pipeline now occur in summer as well as winter, as gas-fired power plants are used to meet rising summer electricity demands. This has greatly increased the importance of natural gas in our country’s overall energy picture, and lower prices are causing many customers to switch to natural gas. Also, the momentum toward natural-gas-powered vehicles offers tremendous potential for gas to increase its prominence in the U.S. energy landscape.
How do Pennsylvania businesses purchase natural gas?
The structure of the region’s natural gas market has been in place for several decades and provides customers with the opportunity to choose a competitive gas supplier and manage their energy costs. The regulated side of the market includes pipelines and local distribution companies that transport natural gas to end-users, but their rates and returns are controlled by state or federal agencies.
Customers of all shapes and sizes can optimize savings by purchasing natural gas from unregulated companies, because they aren’t required to purchase gas from a local utility. Gas suppliers typically collaborate with customers to develop a flexible pricing structure that meets their needs and optimizes current market conditions.
What should customers look for when choosing a natural gas supplier?
Because the composition of natural gas doesn’t vary, customers should select a supplier based on other characteristics, including:
- License. Suppliers should be licensed by the state regulatory commission.
- Financial stability. Assess a supplier’s tenure, history and financial health, as well as the financial condition of its parent, because it needs excellent credit to procure large quantities of gas at favorable prices in the wholesale market.
- Customer service. Ask to see a sample invoice and review the supplier’s responsiveness to orders for triggering or fixing prices and process for issuing confirmations. Will the supplier help you set hedging strategies? Who will be servicing your account? Remember, the salesperson may not be your contact once you’re a customer.
- A straightforward contract. Make sure there are no hidden renewal options in favor of the supplier and that any index pricing is appropriate and utilizes standard industry publications. The tone of the contract is indicative of a supplier’s approach, so take note if it seems one-sided.
How can natural gas consumers protect themselves from pricing volatility?
Natural gas is an actively traded and highly volatile commodity, which helps customers lock in favorable prices, but that also makes it difficult to craft an effective risk mitigation strategy. Some customers set price targets that align with corporate budgetary objectives, while others study the market and determine pricing points to capitalize on dips in the market. Still others are simply content to receive market-based pricing by purchasing gas at index-related prices. Customers can employ options to establish some limits on gas price floors and ceilings, but the best practice is to set a strategy that aligns with your risk appetite and execute it well.
How will Marcellus Shale natural gas production impact Pennsylvania energy?
Pennsylvania gas consumers are already seeing benefits from the Marcellus Shale, because the increased supply and proximity to the market is lowering transportation costs and overall natural gas prices. In terms of the total energy picture, it’s also having an effect on electricity markets because plentiful natural gas, coupled with increasing costs of coal, is causing many older coal-fired plants to retire in favor of gas-fired generation. In fact, Pennsylvania is becoming a prominent natural gas producing state, largely due to the Marcellus Shale.
PPL EnergyPlus, LLC is an unregulated subsidiary of PPL Corp. PPL EnergyPlus is not the same company as PPL Electric Utilities. The prices of PPL EnergyPlus are not regulated by the Pennsylvania Public Utility Commission. You do not have to buy PPL EnergyPlus electricity or other products in order to receive the same quality regulated services from PPL Electric Utilities.
Terry Crupi is director of Natural Gas Marketing and Trading for PPL EnergyPlus, a competitive gas supplier serving industrial and commercial customers in Pennsylvania, New Jersey, Maryland and Delaware. Reach him for wholesale and retail inquiries at PPLRetailGas@pplweb.com or (610) 774-2310.