Tuesday, November 30, 2010

Natural Gas Futures

November 29, 2010

Breaking Away From Coal

HOUSTON — Progress Energy Carolinas, one of the South’s larger utilities, faced a dilemma last winter.
Several of its coal-fired power plants were aging and needed scrubbers to reduce emissions and meet North Carolina pollution laws. Executives figured that even tougher regulations were coming from Washington, and overhauling 11 generators at four plants would have cost nearly $2 billion, which would have been passed on to the company’s 1.5 million electric customers.
Plunging natural gas prices, however, offered Progress Energy an alternative that would save money and help it achieve pollution goals at the same time: scrapping the coal plants and replacing them with two gas plants over the next four years, at a cost of $1.5 billion.
“It’s a turning point,” said Bill Johnson, chairman and chief executive of Progress Energy, the parent company. “We’ve been a coal-based generator for decades, and until a few years ago, we thought we would remain largely coal-based and nuclear until people started talking about carbon regulation. We decided we had to do something about it.”
A lot of utilities are coming to a similar conclusion. Over the last year and a half, at least 10 power companies have announced plans to close more than three dozen of their oldest, least efficient coal-burning generators by 2019. A few are being replaced by new, more efficient coal plants, but many more are being replaced by gas-fired plants.
Coal still accounts for about half of the country’s electrical power generation, compared with about a quarter for natural gas, but that ratio has been shifting gradually toward gas over the last decade or so.
Gas burns cleaner than coal, helping utilities meet state and corporate goals for reductions in greenhouse-gas emissions. Older coal plants, on the other hand, require expensive upgrades, including scrubbers and other controls, to meet coming compliance rules to reduce mercury, nitrogen oxide and sulfur dioxide emissions. Energy specialists estimate that compliance with new federal regulations alone could require $70 billion of investments over the next decade for replacing or retrofitting the coal power fleet.
Just as significant, gas prices have remained at depressed levels over the last two years after a two-thirds collapse from the 2008 economic tumult, while coal prices have increased by more than a third this year because of higher production costs linked to tougher regulations and increased demand from China. Many people in the industry believe that gas prices will stay relatively low because of the proliferation of gas drilling in shale fields across the country over the last five years.
“Coal is losing its advantage incrementally to gas,” said Michael Zenker, a gas analyst at Barclays Capital, “and as long as gas prices stay as low as they have been, it’s going to continue indefinitely.” New gas generation capacity will outstrip new coal generation capacity by more than 30 percent through 2020, according to projections from the Energy Department. And Credit Suisse predicts that the replacement of coal plants by gas plants over the next seven years could lower annual demand for steam coal, which is burned for electricity, by 15 to 31 percent and increase demand for gas by 8 to 16 percent.
“It has the potential to reshape energy consumption in the United States significantly and permanently,” said Dan Eggers, a Credit Suisse energy analyst.
Although coal is also being replaced by nuclear and renewable energy sources in some places, energy specialists say that gas will be the main benefactor because of availability and cost.
Since burning gas emits a fraction of the greenhouse gas of coal, environmentalists tend to favor the switch, although some worry that more gas drilling could pollute groundwater because of the chemicals used in breaking up shale rock.
Pollution laws generally make gas more appealing than coal. Even as many states like Colorado and Michigan enacted stricter pollution laws, the Environmental Protection Agency last summer imposed new limits on sulfur dioxide and nitrogen oxide emissions in 31 Eastern states and Washington by 2014.
Under court order, the E.P.A. is due to set a national standard for mercury emissions next year that will be phased in over the next three years or so. The E.P.A. is also pressing for efficiency improvements at existing coal plants to lower carbon emissions linked to climate change.
“The biggest challenge we face in this industry is this tsunami of regulatory requirements,” said Frank Prager, vice president for environmental policy at Xcel Energy, a Minneapolis-based utility that has proposed to close four or five coal-fired generators in Colorado and replace them with two gas-fired plants to comply with a new state air pollution law.
“It will be more cost-effective to get off coal and turn toward natural gas than it is to retrofit a lot of these facilities,” Mr. Prager said.
Seventy percent of the nation’s coal plant fleet is more than 30 years old and a third is over 40 years old. Credit Suisse estimates that more than 30 percent of the American coal generating fleet have no emission controls at all, while another third lack either a scrubber for removal of sulfur dioxide or other controls for nitrogen oxides. Those plants, which are largely inefficient, will need expensive overhauls under the new rules.
Sonny Garg, president of Exelon Power, said he expected that the plants with no emission controls would probably be closed by their owners, who he says will be wary of investing billions of dollars on old equipment. “It’s a significant transformation,” Mr. Garg said.
Exelon Power has already announced the closing of three Eisenhower-era, coal-fired generators in Pennsylvania by May 2012 because low gas prices have made retail electricity rates so low the plants are no longer economical to run.
Of course, not everyone thinks gas makes more economic sense. For example, a coalition of investors is building a $4 billion coal-fired generation plant in Illinois, betting that coal prices will remain low enough and regulations light to outperform gas.
Indeed, retrofitting a coal plant can be somewhat cheaper than constructing a new combined cycle gas turbine, industry officials say.
“A very wide range of utilities are wrestling with this issue of identifying what plants they would close because they are anticipating these regulations and there is a lot of planning going on right now,” said Revis James, director of energy technology assessment center at the Electric Power Research Institute.
Utility executives have long been cautious about using gas because its price has historically bounced around unpredictably while coal prices have typically been low and stable. But that appears to be changing. Over the last decade, new drilling techniques have brought a century’s supply of reserves within reach.
For Progress, the decision to scrap coal-fired plants and replace them with gas-fired plants was a drastic change in its business plan. It meant reducing the utility’s coal-fired production capacity by 30 percent while increasing gas power from less than 4 percent of its production capacity to a projected 25 percent after the gas plants are built.
“You had to believe that gas was available long term” at reasonable prices, Mr. Johnson, Progress’s chief executive, said of the decision. “Around the country, people are having to have the same discussion, and what I think you are going to see is a significant move from older coal plants to newer gas plants.”

Wednesday, November 24, 2010

The Solid Middle

Record U.S. Exports Reflect Midwest Boom With 3.7% Unemployment


The unemployment rate in North Dakota is 3.7 percent, and “if it wasn’t for cable news, we probably wouldn’t have any idea that the rest of the country was any different,” said Doug Johnson, co-owner of crop insurer TCI Insurance in West Fargo, who added six new employees this year.
As businesses across the U.S. struggle to recover from the deepest recession since World War II and the national jobless rate remains stuck at 9.6 percent, Johnson has benefited from his location in the northern Great Plains, where a boom in commodities, such as wheat and soybeans, is helping to create jobs, lift farmers’ incomes and fuel demand for goods ranging from Deere & Co. tractors and Agco Corp. combines to dinners at local restaurants.
The agricultural Midwest -- particularly North and South Dakota, Kansas and Nebraska -- has been leading the U.S. economic recovery as its banks, businesses and households avoided the worst of the housing bubble’s collapse and the financial crisis that followed. Now the region is getting a further boost from record exports of commodities, driven by demand in China and Russia and a declining dollar. U.S. farm shipments next year may surpass the 2008 record of $115.3 billion, Joe Glauber, the U.S. Department of Agriculture’s chief economist, said last month.
“This has been the brightest spot in the U.S. economy throughout the recession, the only part of the country that has held up reasonably well,” said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania.
‘Significant Tailwind’
“The rise in commodities prices has been a very significant tailwind for the entire region,” as strong demand worldwide drives sales of products, including agricultural equipment, financial services and fertilizer, he said. “It goes beyond the farm itself.”
Ray Gaesser, 58, who grows soybeans and corn near Corning, Iowa, says he installed new drying and grain-handling equipment this month and may buy tractors, combines or planters next year.
“We are in a cycle that is good for agriculture right now,” he said. “We are pretty optimistic.”
North Dakota and two other states in the region had the lowest unemployment rates in the U.S. during September, with South Dakota at 4.4 percent and Nebraska at 4.6 percent. These are also the three states with the largest share of gross domestic product from agriculture: 10.9 percent for North Dakota, 9.4 percent for South Dakota and 6.8 percent for Nebraska, according to data from the Bureau of Economic Analysis.
Job Creation
North Dakota and Nebraska will help lead the nation in job creation next year, according to Moody’s, which estimates their nonfarm payrolls will grow by 1.53 percent and 1.35 percent, the third and seventh best rates in the country.
“Obviously the economy in North Dakota did not put a stop to our plans” for expansion, said Johnson, who now employs 23 people at his crop-insurance company.
Farmers have done “extraordinarily well,” Ann Duignan, an analyst at JPMorgan Chase & Co. in New York, said in an interview. “With high commodities and low inputs, you’re looking at significant margins and that means a big splurge of spending into the yearend.”
Duignan recommended farm-equipment manufacturers Agco, Deere and CNH Global NV in a Nov. 9 report to clients. Moline, Illinois-based Deere, the world’s largest maker of farm machinery, is “the No. 1 brand of choice in the crop segment” and best positioned to benefit from the strength in U.S. agriculture, she said. “They’re the ones who are making the money.”
Rising Earnings
Deere reported a 47 percent jump in fiscal third-quarter earnings on Aug. 18 as net income climbed to $617 million, beating analysts’ estimates. The company earned about 65 percent of its revenue and 80 percent of its operating income from the U.S. and Canada in 2009, according to data compiled by Bloomberg.
CNH, an Amsterdam-based unit of Italian automaker Fiat SpA that makes Case and New Holland farm equipment, got 43 percent of its revenue from the U.S. and Canada, while North America accounted for 22 percent of Duluth, Georgia-based Agco’s revenue.
“We’re setting up for a very interesting 2011,” Duignan said. “Overall it’s going to be a good year for farmers.”
Agriculture fared better than other sectors of the U.S. economy during the recession, as an expanding world population and growth in emerging economies supported demand for crops. China was a net importer of corn last year for the first time since 1996, even as its government sold state-owned inventories.
Declining Dollar
The U.S. dollar has declined 7.3 percent in the second half of the year as food prices surged after cold in China, drought in Russia and parts of Europe, and flooding in Canada damaged harvests. The spot price of corn has gained 46 percent since July 1, wheat is up 28 percent and soybeanshave risen 25 percent, according to the USDA. The S&P GSCI Agriculture Index added 41 percent, compared with the 17 percent advance in the broader S&P GSCI Index of 24 commodities.
Farmland values also are rising. Land prices in some areas of the Federal Reserve Bank of Kansas City’s district -- which includes Kansas, Nebraska, Wyoming and parts of Missouri -- increased as much as 12 percent in the third quarter from a year earlier, the biggest jump since the fourth quarter of 2008, the Fed bank said Nov. 12.
Land Speculation
That may be prompting some speculation, as people see land as “an inflation hedge,” Thomas Hoenig, the bank’s president, said Oct. 25 in a speech in Lawrence, Kansas. Buyers are thinking “you can’t go wrong with land,” he cautioned. “I don’t want to see that.”
Farm incomes climbed this year to $77.1 billion, 19 percent higher than the 2000-2009 average of $64.8 billion, the USDA forecast in August.
The increase “is absolutely very important to the broader economy,” said Ernie Goss, a professor of economics at Creighton University in Omaha, who conducts monthly surveys of Midwestern banks and supply managers. “Truck sales are up because farmers are buying trucks. That benefits local auto dealerships. And that creates spending money at the local Pizza Hut.”
While agriculture accounts for 1 percent of the more than $14 trillion U.S. economy, its impact may be 10 times greater when related businesses such as farm supplies, grain handling and food making are included, Jason Henderson, an economist at the Kansas City Fed, said in an October interview.
Lagging Areas
Other parts of the country are still lagging behind farming areas, according to Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago.
While “the agricultural side of the Midwest is doing well,” the plains states “are very, very different than the industrial Midwest,” she said.
Unemployment in Michigan is 13 percent, the second highest after Nevada at 14.4 percent. The jobless rate in the Detroit metro area has stalled above 13 percent for 21 months.
Consumers in farming areas are in the best shape, according to an index of financial distress that includes credit, housing, and employment compiled by Atlanta-based CredAbility, which provides nonprofit credit counseling. Four of the five states with the most favorable conditions in the third quarter were North Dakota, South Dakota, Nebraska and Wyoming.
That coincides with the Fed districts that had the lowest unemployment rates in September: 7.2 percent for Kansas City and 6.2 percent for the Minneapolis district, which includes the Dakotas.
‘Economic Phenomena’
“Some of this relative success can be explained by strong markets for oil, minerals and agricultural commodities,” Narayana Kocherlakota, president of the Minneapolis Fed Bank, said in a speech today in Sioux Falls, South Dakota. “But it is also true that many cities in the Ninth District, like Sioux Falls, are mostly removed from these economic phenomena and yet they continue to perform well.”
The Minneapolis bank is studying the reasons for the district’s success to determine if they could be “replicated at the national level,” he said.
With incomes climbing, farm-credit conditions improved in the third quarter, according to a report from the Kansas City Fed. More district bankers noted higher loan-repayment rates and fewer loan renewals and extensions, the bank said. Average farm- loan interest rates fell to 6.7 percent, the lowest since the survey began in 1976, and collateral requirements eased.
‘Irrational Exuberance’
“The housing debacle and morass was not nearly as significant in this part of the country,” Goss said. “The banking problems were not nearly as great. There was irrational exuberance on the East and West coasts; that was not here.”
Baker Implement Co., a 150-employee farm-equipment dealer in Kennett, Missouri, has hired six or seven employees in the past two years and may add a similar number during the next year, said President Paul Combs, 45. His business sells tractors, combines, cotton pickers, sprayers, planters and hay equipment.
“We are in a boom” as farmers “put money back into our communities,” he said. “To the extent the agriculture sector does well, though it is a small part of the economy, it is a big part of our economy down here.”
To contact the reporters on this story: Joshua Zumbrun in Cleveland atjzumbrun@bloomberg.net Steve Matthews in Atlanta at smatthews@bloomberg.net
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

Sunday, November 21, 2010

Alternative Energy, Sans Subsidy?

Wind energy, solar power face cloudy future

obama_solar.gi.top.jpgPresident Obama gave billions of dollars in cash to the renewable energy industry, helping it to grow. Now, the game may be up.By Steve Hargreaves, senior writer

NEW YORK (CNNMoney.com) -- After years of rapid growth and darling status among many in Washington, the future of the American renewable energy industry is uncertain.
That's because the government cash it has come to rely on may dry up on Dec. 31.
So far, the government has handed out about $5.4 billion, according to the Energy Department.Before the Great Recession, renewable energy developments were helped by a tax credit, worth generally 30% of the cost of the project. When the recession hit, the stimulus package replaced those tax credits with direct cash grants of similar value. Cash is considered more beneficial than credit to the industry.
Congress could vote to extend the grants, but that's highly unlikely.
If they're allowed to expire, incentives for renewable energy will revert to the old tax credits.
"This is not a great place to be in," said Denise Bode, head of the American Wind Energy Association. "It's an economic opportunity that will be missed."
The wind industry is already hurting -- even with the cash.
Fewer wind farms are being built this year compared to last. The amount of new electricity wind can generate declined 72% in the third quarter compared to the same time last year, according to the wind association.
The wind industry isn't the only one saying it will suffer.
Without the cash grant, "we'll grow at a much smaller rate," said Edward Fenster, CEO of Sunrun, a San Francisco-based company that installs solar panels on people's homes.
"They've ensured that we're building something new everyday," he said
Sunrun has 7,000 customers in seven states. The company installs $1.1 million worth of new systems every day, employing 3,000 contractors.
Fenster said the cash grants let him get cheaper loans than the old tax credits, enabling him to reduce the price of the solar energy he sells by up to 25%. He predicts that price reduction would allow him to double his business next year.
But with "cut spending" the mantra on Capitol Hill, slower growth may be the new reality.
"On a gut level, a lot of the conservatives just don't like to see the government handing out checks to people," said Kevin Shaw, an energy lawyer at Mayer Brown. "I just don't see the grant program being extended."
But the White House does. The Obama administration has proposed a plan: Pay for it by using money left over from the stimulus package. That's led some analysts to at least give it a shot at passing.
"You have a road map from the White House," said Whitney Stanco, an energy analyst at the Washington Research Group. "And previously, Republicans have been amenable to using unspent stimulus funds to pay for other priorities."
A spokesman for presumed Speaker of the House John Boehner wouldn't get into details about what the incoming house might fund.
He did say that Republicans support all forms of energy development, including renewables and nuclear power, provided that any money for them comes from expanded domestic oil and gas drilling, a prospect that looks dim.
There's another piece of legislation that could provide support for the renewable industry besides the cash grant -- a mandate that would require utilities to buy a certain percent of their power from renewable energy.
About 30 states already have such a mandate, and the industry has been pushing hard for a federal standard of at least 15%.
But most analysts say that while a broader "clean energy" standard that includes nuclear and natural gas may have a slightly better chance of passing, neither idea will gain traction in the next year.
Even absent the cash grants or the requirement to buy renewable power, some analysts say the sector is not doomed.
Michael Hennessy, a wind analyst at Bloomberg New Energy Finance, is predicting wind turbines will add about 8 gigawatts of power in 2011.
That's up from 5 or 6 gigawatts projected for hard-hit 2010, but below the record breaking 10 gigawatts in 2009.
The country has about 1,100 gigawatts installed from all sources, with wind accounting for the vast majority of what people consider renewable energy.
"It doesn't bode horribly in our view," Hennessy said of the cash grants expiring. It's just not as good as it could be.  To top of page