Winter’s Arrival Highlights Value of Natural Gas Hedging

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Today’s guest blog is by Andy Whitesitt, Vice President, ACES Power. ACES Power is a national energy management company which helps its members and customers buy, sell and manage energy more efficiently and with less risk. 

For the past 15 years, I’ve been responsible for procuring fuel for power generation across the U.S. Therefore, I’ve learned firsthand what volatility in natural gas prices does to power prices and ultimately the rate that end-users pay for their electricity. Natural gas hedging provides a tool to help reduce some of this volatility.

Based on my experience with hedging natural gas for power generation, one thing stands out – natural gas prices can be volatile. While luckily, natural gas markets and utilities in the Southeast haven’t encountered volatility recently, other areas of the country have experienced natural gas price volatility around weather events and pipeline constraints. Watch the Weather Channel and the markets this winter to see the correlations.

As the U.S. retires coal generation, the demand for natural gas for power generation has increased and will continue to do so for decades to come, especially as electric vehicles and other electrified technologies come to market. In addition, the U.S. will see more demand from natural gas from LNG exports, exports to Mexico and greater industrial demand. As a result, the U.S. will need to produce more natural gas. While it seems that we have adequate supply to meet all these needs, any disruption to supply – regardless of how brief – can create price volatility and cascading effects on electric rates and bills.

Over the years, I’ve followed many analysts who forecast natural gas prices. Right now, there is strong agreement that natural gas prices on average will remain near $3-$4/MMbtu for many years. However, over time, forecasting natural gas prices has been challenging and many of the best analysts have been wrong. Natural gas hedging allows power producers to reduce uncertainty in price forecasts, provide greater certainty around fuel costs and ultimately less volatility in end-user electricity prices.

Additional, if we look back over time, natural gas imports and exports were conducted in a limited and somewhat predictable fashion – the US sourced any imports from Canada and exported only minimal amounts of natural gas to Mexico. All that’s about to change, based on policy and market trends. We’ve begun to export natural gas as LNG around the globe, and could potentially export as much as 8-10 Bcf/day across the globe – or about 10-15 percent of today’s total U.S. production.

This points to the strong potential for global events to increasingly impact domestic natural gas prices. Most global LNG pricing is tied to crude oil and has been very volatile during geopolitical events. Events that historically have not impacted US natural gas prices may now have the potential to do so. With this additional uncertainty and change in the way the U.S. gas markets have operated, hedging natural gas may become even more important to anticipate and compensate for events out of the control of utilities and regulators.