Natural gas will drive power price hike: spirit of Enron lives in Ontario

When George W. Bush became U.S. president in January 2001, his friend Ken Lay, the CEO of Enron, tried hard to persuade him to adopt the carbon emission reductions required by the Kyoto Protocol. Enron, as you will remember, was a new giant in the U.S. energy business until its spectacular collapse in August 2001. Though it had acquired a fleet of power plants and was active in the newly deregulated California electricity business, Enron had begun as, and was primarily still, a natural gas company.

Lay’s support for carbon reductions was the result of simple arithmetic. Half of America’s electricity in 2000, nearly two trillion kilowatt-hours, had come from coal-fired generating plants. Almost two billion tonnes of carbon emissions had accompanied this output. Because gas-fired power generation is less emission intensive than coal-fired, one obvious and fast way to chop power-sector emissions would have been to shift some of that coal-fired power to gas. Lay knew that even a small overall shift toward gas would result in major sales for properly positioned gas companies. And no company was better positioned, or politically connected, than Lay’s Enron. So, unlike his colleagues in other energy companies, Lay supported the Kyoto Protocol and its requirement for emission reductions.

But Bush understood, well before Enron tanked in August, that trying to meet the Kyoto target through a shift to gas was a bad idea. First, it was a glaringly obvious political non-starter: U.S. senators, who have the final say on whether America adopts an international treaty, had made it plain they would never ratify Kyoto. Second, coal plays a role in America’s life and economy that extends far beyond its gargantuan power output. Shifting to gas, on the Kyoto timetable, would have caused an economic calamity.

Political capital is a president’s main source of power. There was simply no way Bush was going to lead off his presidency with a quixotic effort to force a disruptive transformation in the American power industry.

Subsequent developments proved it was the right decision. Beginning in 2002, the price of natural gas on the North American market began trending upwards, reflecting tightening continental supply. Through 2003, the price of gas per unit of heat was three to four times that of coal. It has stayed at least in that range since then, sometimes spiking to over $10 per million Btu. Yesterday, May 14 2008, gas futures for 2012 were selling for over $8.90. Nobody should be surprised by news of the rising natural gas price.

Nor should anyone be surprised that this has caused dramatic electricity price increases. In the U.S. Northeast, where concern over emissions led to a rush of gas-fired generating plant construction in the late 1990s, retail residential electricity prices are now, on average, 15.85¢ per kWh, by far the highest in the continental U.S. In coal-fired Ohio, they are 8.19¢.

European governments, quick to support Kyoto and condemn Bush for abandoning it, are learning the hard way that they won’t meet their own Kyoto targets without a wholesale shift from coal to nuclear or gas in power generation. Germany, which will phase out nuclear by 2020 and has put a moritorium on new coal construction, has no alternative but gas.

In the middle of all this, Ontario sticks to its plan to phase out coal by 2014 and hold the line on nuclear capacity. Everybody knows that this province cannot double renewable capacity by 2014, as planned—unless the plan includes annexing hydro-rich Quebec or Manitoba.

How, then, will we plug the 6,000 megawatt electricity supply gap when coal exits in 2014? With gas. The Ontario residential price of electricity is around 12¢ per kWh. Two weeks ago, over 500 megawatts of gas-fired capacity entered service. In which direction will retail power prices go?

The spirit of Enron lives in Ontario.