Dynegy says natural gas in "uncharted" area
NEW YORK (Reuters) - Dynegy Chief Executive Officer Bruce Williamson said U.S. electric generators are entering "uncharted territory" this summer with natural gas prices above $10 per million British thermal units.
Natural gas prices haven't been in double digits since late 2005 after back-to-back hurricanes in the Gulf of Mexico disrupted production of gas, a key fuel for power generation, especially in the summer when power plants run at maximum output to meet demand for air conditioning.
The NYMEX 12-month Henry Hub strip prices settled at $12.21 per million Btu on Wednesday, the highest since mid-December 2005, according to Reuters data. Last summer, gas futures were below $7 per million Btu.
"If you start with $11 or $12 natural gas and you add hurricane on top of that, we could have some very lofty gas prices," Williamson told the Reuters Global Energy Summit in Houston.
"I think we're going to see a transition to where natural gas is a double-digit commodity," Williamson said. Gas is likely to average between $10-$12 per million Btu this summer, with dips seen at $8-$9 and high points in the upper teens, Williamson said.
An extremely hot summer sending gas above $20 per million Btu "wouldn't surprise me," he said.
Dynegy has more than 3,000 megawatts of lower-cost coal generation in its 19,000 MW fleet, mostly located in the Midwest, a region dominated by coal-fired plants.
Those plants see a higher profit margin when gas sets the wholesale price of power during the summer months. In many regions gas sets the wholesale price most hours of the day.
Williamson said Dynegy's plants are ready to run for the summer season after experiencing forced maintenance outages in the first quarter that reduced the fleet's overall availability rate below 85 percent, under Dynegy's goal of 90 percent.
"We've got some ground to make up," he said.
Dynegy's expansion effort to invest in new coal and gas-fired power plants with development partner LS Power has slowed due to rising material and labor costs and pressure on forward power prices that make it hard to justify new construction economics, Williamson said.
The cost of building a traditional coal plant has risen to $3,000 to $4,000 per kilowatt, up from $2,500 a year ago, Williamson said.
As power-plant construction is delayed around the country, earnings improve at existing plants. "We have seen an acceleration of earnings of our existing assets," Williamson said.
(For summit blog: summitnotebook.reuters.com/)
(Reporting by Eileen O'Grady, editing by Richard Chang)
