Shale boom reduces producers' profits, kills alternative energy projects

Posted: Jan 18, 2012

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Natural gas extraction

Electricity prices in the United States have fallen by half since 2008 due to a glut in natural gas supplies, which has led to decreased investment in other forms of energy.

Natural gas is now the cheapest option for power generation, which has led companies to shelve wind and nuclear power projects in the country. The largest wind energy producer, NextEra Energy Inc., canceled plans for new wind projects next year, and Exelon Corp. has decided not to expand its nuclear power plants. CMS Energy Corp. in Michigan has canceled its plans to build a $2 billion coal-fired power plant.

The low price of gas has been mirrored in the electricity market, according to Aneesh Prabhu, an analyst with Standard & Poor's Financial Services LLC. Electricity pricing is linked to the gas market, so profits for power producers have shrunk dramatically. Tighter margins have discouraged investments in coal, nuclear and wind projects.

"You're lowering the earnings ceiling every time natural gas prices drop," said Mark Pruitt, a Chicago-based independent industry consultant.

The shift will have an impact on the clean energy sector for decades to come, analysts said. The low prices have already drained the nuclear industry resurgence as well as carbon capture and sequestration projects related to coal-powered production.

Investment in wind is also slowing, due to cheap gas prices, a lack of transmission infrastructure and subsidies that will expire next year.

Analysts warned that a broad shift from coal to gas could leave the industry with few alternatives, especially once gas prices rise again.

"The way to make $4 gas $8 gas is for everyone to go out and build combined-cycle natural-gas plants," said Michael Morris, chairman of American Electric Power Co. Inc. "We need to be cautious about how we go about this".

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