Ferguson’s Forecast: Pricey Gas, Pricey Electricity

By Published On: March 5, 2005

Yesterday, the average NYMEX market price of natural gas for the next 12 months was $7.37/MMBtu. The delivered price in California is about the same, which means the state?s gas-fired power plants are looking at pretty pricey gas for the coming year. The cost of electricity from these plants will reflect these high prices. The amount of gas required to generate one kilowatt-hour of electric energy is known as the ?heat rate? of the plant. The larger the plant?s heat rate, the less efficient it is. Despite many new plants that have come on line in recent years, the average heat rate of California gas-fired generating plants is still about 9,000 Btu/kWh. That is, on average, 9,000 Btu of energy from gas is burned to generate one kilowatt-hour of electricity. At a price of $7.37/MMBtu and a heat rate of 9,000 Btu/kWh, the cost of fuel needed to generate one kilowatt-hour is an amazing 6.6 cents?for fuel alone! (The interested reader can verify the math.) Capital, operation and maintenance, and other costs must also be recovered, and plants won?t operate unless there is some profit. All told, wholesale gas-fired power in California will cost upwards of 8 cents/kWh in the coming year at today?s prices. California, however, gets something of a break because gas prices are highest in winter, but more electricity is generated in summer. On the other hand, the dearth of snow in the Northwest may limit imports of hydroelectric power from the region this year and increase the need for gas. Electricity from wind, geothermal, and biomass, renewable energy resources, is available at prices less than 8 cents/kWh. Wind power is considerably cheaper. Given the gas prices we?re seeing today, the state?s policy to increase reliance on renewable energy looks like a no-brainer.

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