Portfolio strategies for the new power-fuel market.
John Corrigan and Jim Hendrickson are partners with Booz & Co., in the Dallas and Washington, D.C., offices, respectively.
There are two major issues confronting power generators in the United States—the emergence of ample supplies of natural gas at moderate to low prices and the prospect of more stringent air emissions regulations, most notably the Cross State Air Pollution Rule (CSAPR). Each presents both threats and opportunities. How utilities respond will be driven largely by how they answer two questions—both relating to the underlying level of certainty of each trend.
First, how resilient will shale gas production be over the long-term?
And second, how will CSAPR fare against re-emergent political opposition and practical economic considerations?
Markets vs. Regulations
While forecasts for shale gas production vary greatly across different sources and points of view, even the lower-end consensus points to a significant shift in the fuel and generation dynamics in North America. Shale gas forecasts (see Figure 1) point to a gas supply whose growth outstrips demand even as drilling pulls back in response to low market prices. This points to a prolonged period of low-priced natural gas.