Hydropower ‘Stealing’ Share From Natural Gas: Energy Markets

Hydropower ‘Stealing’ Share From Natural Gas
U.S. natural gas prices are poised to extend their longest-ever decline as heavier-than-normal rainfall boosts hydropower generation from plants in the Pacific Northwest, cutting demand for gas-fired electricity. Photographer: Derick E. Hingle/Bloomberg

U.S. natural gas prices are poised to extend their longest-ever decline as heavier-than-normal rainfall boosts hydropower generation from plants in the Pacific Northwest, cutting demand for gas-fired electricity.

Water volumes from April through September at the Grand Coulee Dam in Washington state, home to the nation’s biggest power plant, will be the highest in nine years, according to National Weather service forecasts. Precipitation levels will be above average in early March in Washington and Oregon, which hold 38 percent of the nation’s hydropower capacity.

Natural gas is falling for an unprecedented fourth consecutive year as rising production from shale formations swells supplies. Now hydroelectricity may displace as much as 1.5 billion cubic feet a day of consumption from January to July, according to Credit Suisse Securities USA, more than enough to run all of the gas-fired electricity plants in Oregon and Washington. Prices may slip another 12 percent in the second quarter, according to Barclays Capital.

“Power generation is what the bulls tend to point to as an area of growth for gas demand, but now hydropower is stealing some of the share from gas,” said Cameron Horwitz, an analyst in Houston at Canaccord Genuity. “You are taking away one of the stronger bullish arguments for gas prices.”

Natural gas for April delivery fell 4 cents, or 1.1 percent, to settle at $3.778 per million British thermal units on the New York Mercantile Exchange, bringing the market’s decline this year to 14 percent. A fourth drop this year would extend the longest stretch of annual declines since the futures began trading on the Nymex in 1990.

Price Decline

Prices may average $3.75 per million Btu in the second quarter, from $4.25 in the first three months of the year, according to Biliana Pehlivanova, an analyst with Barclays in New York.

Gas generated about 24 percent of electricity in the U.S. last year, up from 19 percent in 2005, as the cleaner-burning fuel replaced coal, according to the Energy Department.

The Bonneville Power Administration, a Portland, Oregon-based government agency that sells power for federally owned hydroelectric plants in the Northwest, is preparing to market hydropower at “very low rates, or for free” to encourage coal and gas-powered plants to reduce output, according to Doug Johnson, a Bonneville spokesman.

The agency may displace as much as 1,000 megawatts of thermal generation from May 1 to June 30, enough for the city of Seattle, to protect endangered fish and avoid curtailing wind-energy production, Johnson said in a telephone interview today.

More Rain

The Pacific Northwest will experience higher precipitation levels because of the La Nina weather phenomenon, according to Matt Rogers, a forecaster with Commodity Weather Group LLC in Bethesda, Maryland. La Nina, characterized by falling temperatures in the tropical Pacific Ocean, can affect global weather patterns.

The water level upstream of the Grand Coulee Dam will average 65.8 million acre-feet in the second and third quarters, the highest level since 2002, according to the Northwest River Forecast Center, a unit of the National Weather Service.

Electricity from the 7,079-megawatt power plant on the Columbia River is delivered to 11 western states, stretching as far south as New Mexico, according to Lynne Browgher, a spokeswoman for the Grand Coulee dam.

“We will see significant pickups in water levels up there in the next two to three months and you are going to have a good supply of hydro generation into the spring and summer,” Rogers said.

Pacific Northwest

Hydropower generation in the Pacific Northwest will rise to 105 billion kilowatt-hours this year, from 96.7 billion last year, according to Elias Johnson, an analyst at the Energy Department in Washington.

“A strong water year will translate into a significant year-over-year increase in hydropower at the expense of gas demand,” said Teri Viswanath, a Houston-based director of commodities research at Credit Suisse. “It will inevitably lead to a greater-than-anticipated gas surplus.”

Rising output pushed gas inventories to a record 3.84 trillion cubic feet in the week ended Nov. 5. Gas stockpiles may reach 4 trillion cubic feet in late October or early November after utilities and storage companies stocked up the fuel to prepare for peak demand during the cold-weather months, according to Barclays Capital.

Gas production may average a record 62.32 billion cubic feet a day this year, according to the Energy Department.

The government “expects near-record-high inventories to continue through most of 2011,” the Energy Department said in its monthly Short-Term Energy Outlook on Feb. 8.

Hydroelectric generation will rise to 702 million kilowatt-hours per day this year from 696 million last year, the Energy Department said in the monthly report. Hydroelectric plants supply about 6.4 percent of U.S. electricity demand.

“Hydropower compounds gas’s bearish outlook,” said Horwitz, who estimated that 1 billion cubic feet a day of gas demand may be displaced by hydropower.

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