Abstract
Natural gas has become the fuel of choice for new power plants being built across the USA. But the dramatic increase in natural gas prices since the 1990s should be a cause for ratepayer concern. Against this backdrop of high, volatile and unpredictable natural gas prices, increasing the market penetration of renewable generation such as wind, solar and geothermal power may provide economic benefits to ratepayers by displacing gas-fired generation. The extent to which natural gas forward prices match fundamental price forecasts is investigated by comparing the prices of natural gas futures, swaps, and fixed-price physical supply contracts to “reference-case”’ gas price forecasts from the EIA. Specifically, by displacing variable-priced natural-gas-fired generation, fixed-price renewable generation not only directly mitigates fuel price risk, but also reduces demand for natural gas, which in turn places downward pressure on natural gas prices—a benefit that flows through to all gas-consuming sectors of the economy. The direct risk mitigation benefit of renewable generation is not always recognized in quantitative resource evaluations, which often use uncertain natural gas price forecasts to compare the levelized cost of gas-fired generation to the cost of fixed-price renewables, and therefore do not consider the consumer benefits of price stability. In many cases, this gas price suppression is predicted to be sizeable enough to outweigh any incremental costs associated with increased renewables penetration, even without considering the direct risk mitigation benefit.
Published Version
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