Low Natural Gas Prices Dim Future of NJ’s Power Sector

Moody’s report sees far-reaching implications for power, pipeline and coal

With natural gas prices at a 10-year low, it is a good time to be a homeowner who uses the fuel to heat their homes. In some cases, prices have dropped by more than one-third this winter for consumers.

Not so good for the power industry, however.

Take NRG Energy, the Princeton-based independent power supplier that saw its stock prices dip to a 52-week low yesterday, a reflection of how cheap natural gas prices have deeply eroded the profits of unregulated owners of generation units.

It is not going to improve anytime soon — at least if a report from Moody’s Investor’s Services is accurate.

The rating agency suggested the U.S. energy sector is undergoing a permanent change as natural gas prices will remain low for the foreseeable future, with significant implications over the next decade for the power, pipeline, coal, and other sectors.

“Moody’s believes that low natural gas prices — currently at a 10-year trough — will continue well beyond 2013. This is creating a fundamental shift in North America’s energy infrastructure, as low prices continue to erode margins for unregulated power companies such as Exelon, FirstEnergy (the owner of Jersey Central Power & Light, the state’s second biggest electric utility) and PPL,’’ said Jim Hempstead, a Moody’s senior vice president and author of the report.

It also could upend New Jersey’s efforts to develop new power plants, a step Christie administration officials hope will lower some of the nation’s highest electricity prices in the nation.

“No one is going to make a capital investment with prices this low,’’ said Robert Marshall, senior vice president with Salmon Ventures LTD, an energy consulting firm based in Millville.

If that assessment is correct, it has implications for several efforts to build new power plants in New Jersey, including a state-sponsored initiative that awards ratepayer subsidies to three proposed power plants to add new generation here.

How much so will be known in May when the three power developers are supposed to bid in an auction held by PJM Interconnection, the operator of the regional power grid. The auction is designed to ensure there is enough electricity supplies to power all of the region’s needs three years from now.

Two of the three developers already have asked the state to allow them to hold off bidding into the auction, because of the ongoing volatility in the energy markets. Marshall said it may cause the power developers to seek even more subsidies from the state.

Even with all the turmoil, however, a separate developer, LS Power has broken ground to build a new 738-megawatt gas-fired plant in West Deptford in Gloucester County.

Paul Fremont, an analyst with Jefferies & Co. said the decision to move ahead with the plant suggests the PJM’s Reliability Pricing Model (RPM) is working as intended, incenting power suppliers to build even when electricity prices are lower.

The system has been widely criticized by New Jersey regulators and others, who say it has failed to achieve its purpose to encourage new power plant construction, while saddling ratepayers with an extra $1 billion or more of costs each year. The extra costs to provide capacity — or the reserve needed to meet higher demand — is
added on to the costs power plants earn for the electricity they produce.

Meanwhile, PSEG Power, a subsidiary of Public Service Enterprise Group, is mulling over plans to build a new gas-fired plant in Seawaren or Newark, a decision the company is holding close to the vest before the upcoming May auction.

“I would not rule out new construction by one, or possibly two parties,’’ Fremont said.

There is much uncertainty about what will happen because of the low natural gas prices, which establish the market price for electricity power suppliers get for the power they produce.

“Lower gas prices are the biggest problem facing the large portion of the merchant generating fleet,’’ said Paul Patterson, an energy analyst with Glenrock Associates. “All fuels other than natural gas are getting hammered.’’