Imagine a world without a decade of unlimited capital availability for E&P producers to drill and frack in what is now dubbed the “shale `revolution”. Said differently, can you imagine if Henry Hub prices ranged from $4 to $14 per MMBtu again, like it did in 2003-2009:
Who gained the lions share of wealth and economic prosperity from all of that capital incineration? Oil & Gas companies spent many MANY billions of dollars, financed by low interest rates and cheap capital, only to drive oil & gas prices through the floor. Energy as a sector was the worst performer during this period. Fracking as a business model ruined balanced sheets and many companies eventually filed bankruptcy. Here’s a good video on it. Now that we know investors didn’t gain any wealth from the “shale revolution”, how about consumers?
All of that cheap gas went into the electricity grid and home heating, but from the perspective of the electricity utilities, the price of their feedstock source of energy got cut in half. Wholesale power prices fell, but did electricity rates fall as well? The answer is a resounding NO, retail electricity rates have gone up despite natural gas prices going down (refer to the chart below). The consumer didn’t get to enjoy any of the wealth and economic prosperity from all of that money either!
Well why not, what’s going on here? Why didn’t the retail customer get lower electricity bills? Why didn’t the savings from all of that cheap gas flow to the consumer? It’s because the utilities have captured all of the profits from falling wholesale power prices without passing them onto the public.
Utilities stole the wealth created by the shale revolution!
The following chart is the utility sector total return but it only goes back to late 2011. I think they’ve done pretty well, and it would look even better (for them) if the chart went further back:
Since 2007 or so, total US electricity generation has been basically flat:
They’re not making more electricity every year, but they ARE making more money! Utilities are mostly regulated, so they earn a regulated (or negotiated) return on assets invested. The more they invest, the more they earn, and boy have they been investing in renewable energy!
The consumer thinks this is a good thing, but as we’re starting to see throughout the country, the reliability of the electricity grid is starting to negatively impact our standard of living. Rolling blackouts used to be an occurrence in third-world countries, not in the United States. Today, citizens of New York City are getting the following messages:
Meanwhile, back in April, the state permanently shut down the Indian Point Nuclear plant due to pressure from environmental groups and politicians. I think this meets the definition of irony.
The same thing is occurring in California primarily due to the recent closure of the coal-fueled Navajo Generating Station (shown being demolished below), and in Texas due to the many lignite plants being retired and replaced with intermittent wind energy. Analysts are predicting a terrible August with regards to energy reliability in California and Texas.
A common narrative is that renewable energy is actually cheaper than fossil fueled generation, but there’s an error in only analyzing the source point of generation. Sure, if the sun shined and the wind blew consistently 24/7 365 days/year, in the same place, then renewable energy could be scaled up to power everything cheaply and in a seemingly environmentally friendly way (at least transferring the mining and recycling externalities to some other country - but I digress). However, that’s not the case. Renewable sources are intermittent and because of that they convey a reliability cost on the rest of the electricity grid.
A good read on this is The Paradox of Declining Renewable Costs and Rising Electricity Prices. Another one is The renewable energy policy Paradox. To put it simply, places with higher percentages of renewable generation typically have higher electricity costs due to ramping up and down of what used to be base load generation.
The bottom line is this… utilities have profited handsomely from low natural gas prices and renewable asset investment. Retail customers have gotten higher electricity prices and less reliability. What’s even worse is the ramifications of what will happen when natural gas prices inevitably go higher, but I’ll leave that for another article.