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SourceBook Weekly December 4, 2000 Issue: 
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SCIENTECH IssueAlert, December 7, 2000
Natural-gas Prices Hit Astonishing Highs; Will Coal and Nuclear Benefit?
By: Will McNamara, Director, Electric Industry Analysis
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According to a Dec. 5 report in the Wall Street Journal, natural-gas prices,
which already had been rising all year, shot up 11.4 percent to an all-time
high of $20 per million BTUs on Monday at the New York Mercantile Exchange.
Today, reports are circulating that spot prices at the Southern California
border reached an astounding $41 on Wednesday, breaking the Daily Gas Price
Index's all-time record high of $39. The sharp increases are viewed as
a reaction to cold weather in the Northeast and forecasts of more to come.
Projections continue to indicate that natural-gas customers will see sharp
increases in their heating bills very soon. The current increase has resulted
from a volatile mixture of rising demand and decreased supplies for natural
gas, which has driven up prices by a total of 218.9 percent, or more than
$5, since a year ago. The uncertain future of natural-gas supplies may
be a contributing factor to an unexpected resurgence of interest in coal-fired
and nuclear power.

ANALYSIS: Unfortunately, we are starting to see real evidence of the projected
rise in natural-gas prices, just as temperatures start to take their downward
slope across most of the United States. Two months ago, the Department
of Energy predicted that households using natural gas would see the largest
year-on-year percentage increase in their bills, with prices rising about
40 percent on average. We've actually been seeing the price increase since
June of this year, when natural-gas hit a then-unprecedented mark of $4.686
per million BTUs. At that time, it was a shock to see those kinds of spikes
for natural gas, especially since the energy source is typically used mostly
in the wintertime for heating. Yet, now as we move into the coldest months
of the season, I project that the all-time-highs of $20 to $40 per million
BTUs are something that might become all too common for the near term.

The Wall Street Journal article on the price spikes also reported that
the American Gas Association estimated that, as of Nov. 24, there were
about 2.502 trillion cubic feet of gas in storage. This represented an
11-percent decrease from the five-year average for that date. The United
States is mostly self-reliant when it comes to natural-gas supplies and,
as I've discussed in previous columns, the fact that a reported 60 percent
of federal lands has been placed off limits for natural-gas drilling certainly
adds to the concern about future supplies. The Clinton administration and
environmental groups have been fiercely protective of federal reserve lands
and prohibited drilling for natural gas (or oil) in states like Alaska,
where some 36 trillion cubic feet of gas is known to be locked underground.


Yet, at the same time, substitute forms of power generation, such as coal
and nuclear, have been restricted or downgraded in favor of natural gas,
which has only exacerbated the current demand on supply. EPA standards
have become so pro-natural gas over the last decade that few coal-fired
plants have been built in the last 10-20 years. Certainly, the public 
resistance
toward nuclear power has been well documented, which has thwarted any planned
production of a new nuclear plant.

Ironically, it seems to me that we now find ourselves at a crossroads in
this industry that may in fact lead to a resurgence of coal-fired and nuclear
power. Especially in states such as Texas and Oklahoma, which are very
reliant on natural-gas supplies, the current uncertainty about the 
availability
of natural gas and reasonable prices poses a major dilemma. Despite the
recent trend of moving away from these two forms of power, I can point
to several developments indicating that the current predicament could create
a forced reliance on these power substitutes.

First, let's look at coal. It's been widely postulated that coal is cheaper
and easier to produce than natural gas, and its supplies are certainly
more abundant. As recently as this year, coal has accounted for about 54
percent of the electricity produced in the United States, although that
majority-hold over power production has come under attack. Emission 
requirements
have forced many generators to shut down or minimize the use of their 
coal-fired
generating stations. In fact, a group of seven utilities*AEP, Cinergy,
Illinois Power, Southern Indiana Gas & Electric, Southern Company, and
Tampa Electric Company*have been hit with a lawsuit by the EPA, claiming
that they contributed to some of the most severe environmental problems
facing certain parts of the United States. Specifically, the EPA has claimed
that the utilities violated the Clean Air Act with emissions from their
coal-fired power plants.

Currently, while natural-gas prices have soared, coal prices have remained
comparatively low and stable. In addition, clean coal technologies are
being put into place to reduce the amount of particulates released from
coal-fired plants. As a result, many generating companies are hedging their
bets that the rise in natural gas prices will continue by maintaining or
increasing their coal-fired generation. For example, AEP is the nation's
leading consumer of coal. Reportedly, about 67 percent of AEP's electric
generation is made at coal-fired plants. In response to the natural-gas
price spikes, AEP confirmed that it will continue to operate all of its
coal-fired plants at full capacity, despite the ongoing lawsuit from the
EPA.

Proponents of coal are using the so-called "natural gas crisis" as an 
opportunity
to argue that electricity from coal can be provided at about half the cost
of other fossil fuels and is less costly and more reliable than intermittent
power sources such as wind and solar. In addition, coal proponents say
that the cost of electricity would double if the United States were to
replace all existing coal-generated power plants with alternative forms
of power.

Nuclear power also could stand to benefit from the comprised supplies and
high prices of natural gas. Following the growing interest among several
European and Asian countries, several U.S. utilities have expressed recent
interest in expanding their nuclear assets. Corbin McNeill, co-head of
Exelon Corp., on Monday stated that new nuclear plants are needed and one
will definitely be built in the next five to 10 years. McNeill also noted
that the question of whether a new nuclear plant was built would depend
on a sustained increase in prices for natural gas, which remains the current
fuel of choice for new power plants. However, he rejected the notion that
building new nuclear plants would require the Energy Department's Yucca
Mountain spent fuel repository to be operational, an event that probably
won't happen until 2010.

Entergy is another example of a company that continues to aggressively
pursue nuclear power and may spark other companies to do the same in response
to high natural-gas prices. In late November, Entergy announced that it
would submit a counteroffer for the Vermont Yankee nuclear plant, which
is already in the midst of being sold to rival buyer AmerGen Energy (the
joint venture between Exelon and British Energy). Entergy, which has been
developing a strong nuclear platform for some time, believes that the 
Northeastern
United States offers a strong market potential for nuclear power, and plans
to increase its offer for the Yankee plant and trump AmerGen's standing
offer of $93.8 million.

The next few months, especially as temperatures continue to drop, should
be very telling on two counts. First, will we continue to see the 
record-breaking
prices for natural gas? (I say yes). Second, what impact will these price
spikes have on coal and nuclear? I think they should only have a positive
impact on future development of these two forms of power. However, the
question is whether or not new production of coal and nuclear can be put
into place fast enough to minimize the potentially disastrous impact from
the low supplies and resultant rising prices of natural gas. Only time
will have the answer to these questions.
===============================================================
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