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Conserving Energy in a Volatile Market: Electric and Natural Gas Prices Are Fair Weather Friends

Posted on: Monday, 20 March 2006, 03:03 CST

By Birritteri, Anthony

Two devastating hurricanes, Katrina and Rita, received much of the blame for soaring energy prices last year, as oil and natural gas production capabilities along the Gulf of Mexico were damaged due to the storms. After the tempests, energy and gasoline prices skyrocketed across the country The price per gallon for gasoline jumped to more than $3.00 per gallon in the Northeast. The price per barrel of crude oil reached a high of $70.85, and natural gas prices for commercial users soared to more than $13 per thousand cubic feet. The price per kilowatt hour for electricity, which increasingly depends on the burning of natural gas for its generation, also rose.

Energy experts and economists were predicting doomand-gloom scenarios for middle- and low-income families who would face difficulties paying their heating bills in the approaching winter months. Businesses were concerned as well, as energy price hikes meant they had to rethink their budget expenditures and overall profitability.

For the first half of December, it seemed as if the predictions were coming true with consecutive days of cold, below normal temperatures. Then the mercury began to rise and temperatures were well above normal for the second half of the month, hitting a high of 56 degrees in Newark on December 24 - a Christmas Eve miracle, perhaps.

What was miraculous was that the warm weather trend continued through January, creating a two-fold effect: less energy consumption and a drop in energy prices. As an example, natural gas prices stood at $8.87 per 10,000 million British Thermal Units (mmBTUs), according to a January 30th reading of the New York Mercantile Exchange. This is a drop from $13.90 mmBTUs in mid-December.

This does not mean, however, that energy users will see a continued decrease in costs. The energy market is volatile, and prices fluctuate due to a variety of reasons, beyond the effects of hurricanes. In fact, energy prices were on an upward trend since the beginning of 2005, well before the storms. The reasons include: drying natural gas wells across the country; regulations that prohibit the exploration and drilling for new oil and natural gas; demand from foreign countries; OPEC oil production changes; and the current instability in the Middle East, including the war in Iraq.

"At the start of 2005, the natural gas market started going up and it never looked back. You gotta say, 'Wow!' " says John Parodi, energy manager for Hoffman-LaRoche, Inc., the Nutley-based pharmaceutical firm. "Usually there are dips and opportunities for companies to lock in prices, but prices kept going higher."

Today, businesses, utilities, third-party energy suppliers and the New Jersey Board of Public Utilities (BPU) are all doing their best to combat the high cost of energy.

The battles in this war are waged on many fronts, but the two dominant strategies are energy shopping and conservation.

According to Parodi, "If there is a silver lining in all of this, it's that high prices make it easier and economical to conserve energy." As chair of NJBIA's Energy Cominittee, Parodi tells member companies this is the time to focus on consumption. I hear colleagues say, 'We looked at certain conservation measures two years ago, but from an economic standpoint it didn't make sense.' What I tell them is 'Go back and take a second look because prices are so much higher now, that maybe some of those projects do make sense.' "

Hoffman-LaRoche spends approximately $20 million a year on energy at its 127-acre campus in Nutley and other New Jersey locations. Onethird of the company's energy expenditures is on electricity and two-thirds are on natural gas. Much of its natural gas is used to generate electricity and steam through its cogeneration unit. According to Parodi, cogeneration saves the company approximately 35 percent on electric costs annually.

Residential, commercial and industrial users who want to conserve energy and realize savings are getting assistance from the BPU through its New Jersey Clean Energy Program (NJCEP). Created as part of the Electric Discount and Energy Competition Act (EDECA), which deregulated the electric market in 1999, the NJCEP provides users with information and financial incentives for renewable energy and energy efficiency measures.

Through the NJCEP, approximately $125 million is made available each year towards technologies that save electricity and natural gas and increase the amount of electricity generated from clean and renewable sources. The BPU works with the New Jersey- Economic Development Authority on many of these funding initiatives.

For companies starting a commercial or industrial project from the ground up, renovating a facility or upgrading equipment, the NJCEP's "Smart Start Buildings" program helps with financial incentives and design assistance for the creation of Smart Buildings. (According to the BPU, these projects must be located in an area designated for growth in the State Plan.)

The NJCEP also promotes on-site power generation with the recovery and use of waste heat under the Combined Heat and Power Program. Besides enhancing energy efficiency, this effort aims to reduce demands on the electric power grid. For the New Jersey area, this is the PJM Interconnection grid. To qualify, a company must purchase electricity from the utility grid. Incentives are paid up to 1 megawatt of capacity.

At last September's Clean Energy Conference, the BPU reported that it had spent $93 million on its energy efficiency programs, saving nearly 325,000 megawatt hours of electricity each year. For more information on the NJCEP, log onto www.njcleanenergy.com.

The New Jersey Clean Energy Program is the main program in the state helping commercial and industrial users, says Gary Marmo, director of sales and marketing at Elizabethtown Gas, Union. "From a utility perspective, we look for those types of applications and services, make customers aware of programs, give them an idea of what the incentives could be and help them fill out the paperwork."

In shopping for energy, many factors come into play when making decisions on price, whether it's for electricity or natural gas. With the deregulation of the electricity market, utilities now enter Basic Generation Service (BGS) auctions where electricity is purchased for a three year period, so that users are not hit with frequent and major cost increases: or so consumers think.

The most recent BGS auction, which took place February 3-7, revealed that electric rates will increase by double digits starting June 1, due in part, to the high price of natural gas, In an auction that included 16 wholesale power suppliers, Public Service Electric & Gas will increase residential monthly rates by 13.7 percent per month; Jersey Central Power & Light will increase rates by 12.4 percent; Rockland Electric Company by 12 percent, and Atlantic City Electric Company by 12.54 percent. In total, the four utilities spent $7 billion to purchase electricity for 3.5 million customers. This equates to 8,150 megawatts of electricity.

On average, utilities paid a price for bulk power that was 55 percent higher than last year's auction. Customers will not realize this steep increase because the high purchase price is being combined with longterm contracts signed over the past two years from previous auctions.

The auction also procured the supply arrangements for larger industrial and commercial customers who have not chosen to shop for an alternate supplier. These users fall under the commercial and industrial and energy price (CIEP) rate class (those with peak loads greater than 750 kilowatts) and also pay a 0.005 cents per kilowatt hour tax because they continue to purchase electricity (the generation, not the distribution) from their traditional utility.

Though these customers can enter into yearly contracts with third- party energy providers, they are also subject to spot market prices within the PJM Interconnection grid if their energy needs exceed the ratio they locked into based on their one-year contract. "Most companies know what they think their electricity needs are going to be for the year," says Sara Bluhm, director of energy and fedral affairs at NJBIA. "What plays into the equation are things such as increased production, additional building space or severe weather temperatures. That is when more generators are called on by the PJM grid."

A trend Parodi sees is large-scale electricity users entering into longer contracts with providers. "In talking with colleagues, there seems to be a move towards longer-term contracts (more than one year) for fear that prices will continue to rise," he says. Roche, as an example, recently entered into a 1.5 year contract with a third-party supplier.

Comparing electric prices then and now, Parodi says they were $3.78 cents per kilowatt hour from 1998 to 2004. In 2005, prices averaged $6.98 per kilowatt hour. "That's an 84 percent increase. Again, all you can say is 'Wow' when you hear those numbers," he says.

In purchasing natural gas, prices differ depending on the type and size of user and from whom it is purchased.

At South Jersey Industries, Inc., the Folsom-based energy supp\lier, residents and commercial users can purchase energy from its regulated utility, South Jersey Gas, or its nonregulated company, South Jersey Energy, which acquires and markets both- natural gas and electricity.

South Jersey Energy (SJE), Michael Renna, president, says the company competitively shops for natural gas from a portfolio of suppliers. "There's a robust wholesale market out there," he says. Through concentrating on the commodity and purchasing strategically, including hedging (buying reserves when prices are low), SJE customers can have stable, fixed natural gas prices for 12- to 18- month periods.

Renna stresses that SJE is not a consultant. The company does the shopping for energy. "We believe we best know customers' energy needs and can put together the best pricing and delivery strategy to enable them to operate their businesses as cost effectively as possible."

South Jersey Gas (SJG), like all other regulated natural gas utilities, sets its prices for residential and small commercial customers for a year, filing its rates annually with the BPU. Residential customers are also encouraged to shop for natural gas from a third-party supplier. Prices for large industrial users are based on the monthly market price. Still, SJG buys natural gas for periods as long as 18 months in an attempt to manage price risks for customers. In addition, according to Jeff Dubois, senior vice president of SJG, the company also hedges to avoid volatile prices.

Even with all the hedging and long-term buying, natural gas utilities still had to increase rates due to the tremendous increase in natural gas prices this past fall and winter (utilities do not make a profit from selling the commodity, but they do profit from its transportation through its pipelines). In December, they asked the BPU for customer price increases. South Jersey Gas received approval for a 24.3 percent increase, while Public Service Electric & Gas received approval for a 15.6 percent increase; Elizabethtown Gas, 22.9 percent; and New Jersey Natural Gas, 23.2 percent.

"As bad as a 24.3 percent increase is, some utilities in the Northeast that cannot practice hedging had price increases of 100 percent," says Dubois.

Comment further on the reasons for energy price increases, Tom Kaufman, manager of rates and tariffs at Elizabethtown Gas, says that, for electricity, it goes back to when natural gas became a generation driver in the market. Natural gas was recognized as a cleaner burning technology in generating electricity than coal.

Interestingly, coal is still the primary fuel used to generate electricity, accounting for a 50.8 percent share (1,974 billion kilowatt hours), according to the U.S. Department of Energy (DOE). Natural gas was used to generate 16.7 percent of all electricity and petroleum accounted for 3.1 percent.

Other drivers for the increase in energy include global demand, especially from Southeast Asian countries, and the impact from the high price of oil.

Residential demand for natural gas has not increased over the years, says Kaufmann, but "no new gas fields are opening and what exists in the Gulf is getting drilled and tapped out,"

While many of the people interviewed for this article say the supply of natural gas is running out and production is declining, DOE statistics reveal that though production hit a peak in 1973, with 22.6 trillion cubic feet (Tcf) processed, and declined to a low point of 16.1 Tcf in 1986, it has been steadily increasing. By 2020, the DOE estimates that production will reach between 25.7 Tcf and 28.0 Tcf.

The estimated new production is being augmented by foreign imports of liquefied natural gas (LNG) - natural gas cooled at -260 degrees Fahrenheit, at which point it becomes a liquid. Trinidad became the major supplier of LNG imports in 2000, with 99 billion cubic feet, or 44 percent of total LNG imports to the U.S. Total imports of natural gas (liquid and gaseous) was 3.5 Tcf in 2000, or 16 percent of the total gas consumed.

Elizabethtown Gas and South Jersey Industries say the import of LNG will help correct the supply and demand imbalance. One particular project they mention is BP's planned Crown Point terminal in Logan Township. Though at presstime the project was on hold pending the U.S. Supreme Court hearing of a lawsuit brought on by the State of Delaware concerning jurisdiction of the Delaware River area in which this site will be located, many in New Jersey are hoping the $600million project will be built.

According to Tom A. Mueller, BPLNG external affairs director, the facility will have a daily send-out capacity of 1.2 billion cubic feet of natural gas per day, enough to meet the demands of 5 million homes.

"The BP import terminal will inject a ton of gas right into the Northeast region, which we believe will have a positive effect on prices," says SJE's Renna. "The amount of volume expected to come from the facility is more than double we would need on our coldest day."

According to Marmo at Elizabethtown Gas, "The economics of LNG are much better than they were in the past, especially with prices the way they are. That is why everyone is looking to build new terminals."

UGI Energy, Services, Trenton, a subsidiary of UGI Corporation, Wyomissing, Pennsylvania, helps customers save on energy costs by counseling them on when to buy electricity or natural gas. According to Robert Libutti, director of corporate development for UGI Energy, "The energy markets have undergone some tremendous cycles in the last year, especially with the hurricane season. Prices have spiked and we've seen some dips. We try to counsel our customers on when it's a good time to buy and when it's a good time to stay out of the market."

With prices beginning to come down due to the unseasonably warm weather, Libutti says UGI is recommending a "layering" strategy. Similar, if not the same as hedging, this practice means buying energy whenever there is a dip in prices to increase a company's energy portfolio.

Explaining how the natural gas commodity is priced throughout the country, Libutti says that all energy companies purchase gas at the same NYMEX price. What varies are the transportation costs of the natural gas. That is negotiated between the buyer and the owners of the transportation pipelines. UGI transports its natural gas through all the major utilities in the state to some 3,000 commercial customers in New Jersey.

The stakes in the energy game are great, but if businesses take advantage of conservation measures and receive the proper buying assistance and counseling from energy providers, then the whole process can be a "gas."

Copyright New Jersey Business & Industry Association Mar 01, 2006

Source: New Jersey Business

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