Betting on the Future: The authors compare natural gas forecaststo futures buys

Journal Article · Fri Jan 20 04:00:00 EST 2006 · Energy

OSTI ID:898941

Bolinger, Mark; Wiser, Ryan

On December 12, 2005, the reference case projections from Annual Energy Outlook 2006 (AEO 2006) were posted on the Energy Information Administration's (EIA) web site. We at LBNL have in the past compared the EIA's reference case long-term natural gas price forecasts from the AEO series to contemporaneous natural gas prices that can be locked in through the forward market. The goal is better understanding fuel price risk and the role that renewables play in mitigating such risk. As such, we were curious to see how the latest AEO gas price forecast compares to the NYMEX natural gas futures strip. Below is a discussion of our findings. As a refresher, our past work in this area has found that over the past five years, forward natural gas contracts (with prices that can be locked in--.g., gas futures, swaps, and physical supply) have traded at a premium relative to contemporaneous long-term reference case gas price forecasts from the EIA. As such, we have concluded that, over the past five years at least, levelized cost comparisons of fixed-price renewable generation with variable price gas-fired generation have yielded results that are ''biased'' in favor of gas-fired generation, presuming that long-term price stability is valued. In this article we update our past analysis to include the latest long-term gas price forecast from the EIA, as contained in AEO 2006. For the sake of brevity, we do not rehash information (on methodology, potential explanations for the premiums, etc.) contained in our earlier reports on this topic. As was the case in the past five AEO releases (AEO 2001-AEO 2005), we once again find that the AEO 2006 reference case gas price forecast falls well below where NYMEX natural gas futures contracts were trading at the time the EIA finalized its gas price forecast. In fact, the NYMEX-AEO 2006 reference case comparison yields by far the largest premium--$2.3/MMBtu levelized over five years--that we have seen over the last six years. In other words, on average, one would have had to pay $2.3/MMBtu more than the AEO 2006 reference case natural gas price forecast in order to lock in natural gas prices over the coming five years. Fixed-price generation (like certain forms of renewable generation) obviously need not bear this added cost, and moreover can provide price stability for terms well in excess of five years

• Research Organization: Ernest Orlando Lawrence Berkeley NationalLaboratory, Berkeley, CA (US)
• Sponsoring Organization: USDOE. Assistant Secretary for Energy Efficiency andRenewable Energy. Office of Solar Energy Technology Program
• DOE Contract Number: AC02-05CH11231
• OSTI ID: 898941
• Report Number(s): LBNL--59931; BnR: EB2502010
• Journal Information: Energy, Journal Name: Energy Vol. Winter; ISSN 0360-5442; ISSN OINODG
• Country of Publication: United States
• Language: English

Related Subjects

03 NATURAL GAS
29 ENERGY PLANNING, POLICY, AND ECONOMY
AVAILABILITY
MARKET
NATURAL GAS
PRICES
STABILITY