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Forecast: NW Energy prices likely to rise modestly January 24, 2010

Energy prices in 2009 reflected both good and bad news for consumers; the good news was that prices for natural gas and oil were much lower than the previous year; the bad news was that a severe recession was part of the reason for the lower prices.

Looking ahead to 2010, I expect a modest recovery of energy prices, the extent of which depends to a large degree on the economy. A robust recovery from the recession would put more upward pressure on energy prices. A sluggish recovery would moderate energy price increases.

Oil prices should increase moderately during 2010. They remain high by historical standards even during the recession. The outlook for oil prices, however, must always be conditioned on developments in the Middle East. Changes in world oil prices quickly find their way to the gasoline station and consumers’ pockets.

Natural gas prices fell by about 50 percent between 2008 and 2009. Many consumers have seen the effects of this reduction in their natural gas bills as distributors pass along cost reductions in rates. I expect moderate natural gas price increases this year.

However, a new development is at work in the U.S. natural gas market that could affect future prices. A couple of years ago, natural gas supplies were expected to decline for the U.S. and Canada. Yet, improved drilling and recovery technologies have unlocked natural gas supplies from shale and other non-conventional formations. The result was a substantial increase in natural gas supplies that, combined with the recession, contributed to the collapse of prices in 2009. While there are questions remaining about the future of these non-conventional supplies, they are likely to help contain price increases for years to come. Nevertheless, the higher cost of developing these supplies will prevent large decreases in natural gas prices in the long term.

Electricity prices for consumers are less volatile than oil and natural gas prices. They are regulated to a greater extent and more insulated from market fluctuations. This is especially true in the Pacific Northwest, where hydroelectricity supplies a large share of our electricity. Hydroelectricity cost does not change directly based on fuel prices.

Future costs of electricity are increasingly likely to be affected by policies addressing climate change concerns. It is important to understand that, nationwide, electricity generation accounts for 38 percent of carbon dioxide emissions.

Because of the large presence of hydroelectricity in the Pacific Northwest, the electric generation share of carbon dioxide emissions is only 23 percent. For example, electricity generation in Washington state produces only 20 percent of the carbon dioxide emissions per kilowatt-hour of the total U.S. electricity generation.

Nevertheless, efforts to reduce carbon dioxide emissions are likely to significantly affect the cost of electricity. Electric utilities in Washington are subject to renewable portfolio standards that require growing shares of electricity supplies to be renewable. Renewable electricity generation is more expensive than existing generation and new natural gas-fired electricity generation. Proposed cap-and-trade systems for greenhouse gases would raise the cost of existing carbon dioxide-emitting generation, especially existing coal plants that account for 85 percent of the carbon dioxide emissions from the Northwest power system. Even improved efficiency of electricity use can raise electricity rates, while at the same time reducing electric bills for homes and businesses that participate because less electricity is consumed.

Conservation vs. new power

Carbon emissions and electricity costs were issues that the Northwest Power and Conservation Council addressed in its new draft Sixth Power Plan for the Pacific Northwest. The resource strategy advocated in the plan is an aggressive pursuit of improved efficiency (conservation) in homes, businesses, and factories.

The council found that much of the region’s expected growth in electricity needs could be met with conservation at far lower cost and risk than building additional generation. In addition, renewable electricity generation acquired to meet renewable portfolio standards in the region will help reduce carbon emissions. The region should improve the operational procedures of the power system to better integrate variable generation sources such as wind, but also should look for other small-scale renewable opportunities in local communities. After renewable power requirements are met, natural gas-fired generation is the next best source, if necessary. In the long-term, other forms of generation, efficiency, energy storage, or operational changes should be considered, researched, and demonstrated, including smart-grid technologies.

Such an energy strategy requires that the region’s citizens and businesses, working with their local utilities, participate in securing their own energy futures. Low-cost supplies of energy can no longer be taken for granted. But energy that is available can be used far more efficiently, reducing the impact of rising costs and resulting in a more sustainable economy.

Terry Morlan, Columbian forecaster; The Columbianhttp://www.columbian.com/news/2010/jan/24/energy-prices-likely-to-rise-modestly/

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