Study: Utilities should consider long-term natural gas contracts

A new study by an energy nonprofit says utilities would save billions of dollars if power plants fired by natural gas used longer-term contracts to acquire a portion of their fuel, rather than relying solely on spot market purchases.

The American Clean Skies Foundation (ACSF) said small changes in current fuel contracting practices can deliver large dividends over the next decade due to record low prices for natural gas. The report, “Power Switch: A No Regrets Guide to Expanding Natural Gas-Fired Electricity Generation,” says the current benefits of low prices might be short-lived if, as expected, natural gas prices trend upward by mid-decade. The report advises power companies, gas suppliers and regulators to work together and agree on new commercial and regulatory terms to “lock in” today’s attractive price terms for several years.

Power sector stakeholders should consider new multi-year gas supply agreements, the report says, and both utilities and gas suppliers must be willing to share some of the risks of future price changes. Long-term contracts provide a means for extending the benefits of affordable natural gas for years to come, according to the report. Therefore, state regulators – PSCs and PUCs – should follow the lead of states such as Colorado and Oklahoma, and authorize longer-term agreements for purchasing natural gas just as they do for long-term coal supplies or renewable energy agreements, the report says.

According to the Energy Information Administration, the domestic electricity sector will spend $330 billion for natural gas between 2013 and 2020. If just 25 percent of this expected demand is met through long-term contracts based on today’s low price horizon, utilities would be able to deliver natural gas power for $16 billion less for every $1 per million British thermal units (MMBtu) that such contracts are below average spot prices.

The report is available for download here.

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