How Natural Gas Flexes Its Muscles

AP News
Posted: Oct 13, 2010 2:02 PM
How Natural Gas Flexes Its Muscles

Natural gas is invisible and odorless, but it sure knows how to make its presence felt in the electricity market.

Even though the fuel is used to create just one-fifth of the nation's electricity, it is natural gas that determines how profitable-or unprofitable-every other form of power is.

No matter whether it is a nuclear reactor or a wind farm that actually generates the power to enliven a television or keep ice cream frozen, it is natural gas that is responsible for how much that power costs.

It is also responsible for the profits of dozens of the nation's biggest utilities, like Exelon, NextEra Energy and NRG Energy.

This is because of the way electricity is priced across much of the country. Throughout the day, regional electrical operators set one price for all the power needed at any given moment. That price is based on the most expensive power supplying juice to the grid at that time, usually natural gas.

So during the middle of a typical day, for example, all power producers in a given region will be paid 10 cents per kilowatt hour because that's the rate the natural gas plants are demanding. For the nuclear plant operator producing power for just 2 or 3 cents per kilowatt hour, it makes for a tidy profit.

But when gas is cheap, gas-fired power plants command a lower rate and therefore lower prices for all generators.

If prices are high and expected to stay high, generators may decide to build a wind farm or a nuclear plant, expecting that those high electricity rates will pay for construction and leave enough for a profit.

When electricity prices are low and expected to stay low, as they are now, generators worry they won't be able earn enough of a return, so they decide not to build.