{"id":182,"date":"2012-01-24T16:18:02","date_gmt":"2012-01-24T22:18:02","guid":{"rendered":"https:\/\/allenergyconsulting.com\/blog\/?p=182"},"modified":"2012-01-25T11:16:08","modified_gmt":"2012-01-25T17:16:08","slug":"gas-producers-entering-the-power-world","status":"publish","type":"post","link":"https:\/\/allenergyconsulting.com\/blog\/2012\/01\/24\/gas-producers-entering-the-power-world\/","title":{"rendered":"Gas Producers Entering the Power World"},"content":{"rendered":"

A question was asked \u201ccould you blog about the strategy for a gas producer to participate in the power market as an independent power producer (IPP)?\u201d\u00a0\u00a0 Given my background in both Oil & Gas and Power it puts me in the perfect position to discuss this.\u00a0 <\/span><\/span><\/p>\n

Let me first start simple and then build up to be a\u00a0large scale\u00a0IPP.\u00a0 The question posed was black and white in terms of participating in the power markets as an IPP.\u00a0 However, it really isn\u2019t that black and white.\u00a0\u00a0 There is potential strategy for the gas producer to unite with the power markets without actually operating a facility.\u00a0 This can be as simple as acting as the hedging agent for the utility.\u00a0\u00a0 We see many people try to emulate the coal markets with their long-term contract arrangements.\u00a0 The difference for gas is the product is fungible \u2013 a molecule at Y is essentially the same as the molecule at X.\u00a0\u00a0 This cannot be said for coal.\u00a0\u00a0 Coal products are non-fungible with unique characteristics.\u00a0 Therefore building a coal plant with a boiler specified to operate with certain characteristics puts the power generator at fuel risk without a long-term contract.\u00a0\u00a0 Beyond the equipment flexibility, fungible nature of natural gas has allowed the forward gas markets to be active and representative to the actual market in the near term.\u00a0\u00a0 This cannot be said for coal as the coal forward market does not represent a significant portion of the physical market.\u00a0\u00a0 Therefore, utilities, who would like a fixed price on natural gas price, can obtain a fix price by participating in the forward gas markets.\u00a0\u00a0 There are several utility executives who would like to deal with gas like coal, but by doing so, all they are doing is shifting the burden of the hedge to the producer.\u00a0\u00a0 There is still value for them to do this, as long as the premium of the hedge is understood.\u00a0\u00a0 Shifting the hedge to the producer will allow the utility who is typically lean on the balance sheet not to be concerned about the fluctuations to the market.\u00a0\u00a0 In theory, the producer should be able to hedge the gas better than the utility since it is their business therefore economy of scale should play into it.\u00a0 The premiums of the hedge will certainly be passed onto the power generator with a little return for the added risk.\u00a0 I suspect a small producer could not fill this role for the utility, since the counter party risk could be too great relative to the value of the producer.\u00a0\u00a0 In a de-regulated environment, it is essentially betting on a position, which is no different than fixed coal pricing if the price is low enough.\u00a0\u00a0 Clearly a bad deal will result in both parties losing in the end.\u00a0 Teaming up with a regulated entity to supply a fixed gas and volume has many significant advantages once the public utility commission has approved the deal.\u00a0\u00a0 There is less risk of not being paid as the market risk is essentially being socialized.\u00a0\u00a0 <\/span><\/span><\/p>\n

The\u00a0large scale\u00a0alternative for the gas producer to act as an IPP offers many competitive advantages along with the associated challenges.\u00a0\u00a0 This strategy still is not black and white.\u00a0\u00a0 There is a potential to take small enough volumes from various fields and qualify as a distributive generator.\u00a0\u00a0 The technology has progressed in the micro-turbine world to make it economical.\u00a0 This volume will not be large, but could work well for areas having to flare gas.\u00a0\u00a0 In essence, most of the generation will be used to supply internal energy use, and on occasion be used to support the grid.\u00a0 Once again, depending on the market dynamics the challenges will differ.\u00a0\u00a0 ERCOT related markets, where most of the market and several actors are de-regulated; more upside value can be captured.\u00a0 Markets with significant regulated actors could compress margins as their returns are less a result of optimal decision making, but more on the approvals of the public utility.\u00a0 In today\u2019s market of essentially zero yields for cash, it becomes a very compelling reason to put your money to work.\u00a0\u00a0 The power sector can bring a relative consistent return with a conservative outlook.\u00a0\u00a0 Building or acquiring a combined cycle can offer decent returns with upside potential.\u00a0 Examining the cost of production of some shale plays, it makes sense to have part of the portfolio of production sold with upside potential.\u00a0 By operating a combined cycle a producer can essentially sell their production with an upside potential.\u00a0\u00a0 There are locational issues which must be examined, but I suspect given the various transmission initiative for renewables, gas units can piggy back on that infrastructure build out.<\/span><\/span><\/p>\n

There are several other key points to consider and local market analysis needed before producers jump into the power market, but I am sure there are several markets\/situations it will make sense for producers to be more active in the power sector.\u00a0\u00a0 Actual implementation will require back office support.\u00a0 The positive note most producers already have some form of risk group and a trade floor. \u00a0If you are a producer, please do call or email me as I can help guide\/assess\/re-affirm your decisions <\/span>dkb@allenergyconsulting.com<\/span><\/a> 614-356-0484.<\/span><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

A question was asked \u201ccould you blog about the strategy for a gas producer to participate in the power market as an independent power producer (IPP)?\u201d\u00a0\u00a0 Given my background in both Oil & Gas and Power it puts me in the perfect position to discuss this.\u00a0 Let me first start simple and then build up […]<\/p>\n","protected":false},"author":1,"featured_media":14,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1,3,6],"tags":[54,14,369],"class_list":["post-182","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-market-insights","category-natural-gas","category-power","tag-gas-producer","tag-natural-gas-2","tag-power"],"_links":{"self":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts\/182","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/comments?post=182"}],"version-history":[{"count":4,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts\/182\/revisions"}],"predecessor-version":[{"id":221,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts\/182\/revisions\/221"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/media\/14"}],"wp:attachment":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/media?parent=182"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/categories?post=182"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/tags?post=182"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}