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In the News: Jeff Dowdell Talks CHP, Natural Gas, and More

By Evelyn Teel

Avalon Energy Services Senior Energy Consultant Jeff Dowdell was the featured guest on the most recent Energy Sense Podcast. Check out the episode to learn about combined heat and power (CHP) – what it is, how it can reduce costs and improve efficiency, and how it improves resilience. Jeff also discusses the future of natural gas as the US moves towards a more renewables-focused fuel mix, as well as considerations for deciding to work with an energy consultant. Interested in a career in the energy industry? Jeff has advice for you, too.

The 23:45 podcast can be found at the following link: https://energy-sense-podcast.simplecast.com/episodes/energy-generation-the-efficiencies-of-combining-heat-and-power-and-how-to-hire-an-energy-consultant

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484-8096, or email us at info@avalonenergy.us.

Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

Copyright 2020 by Avalon Energy® Services LLC

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Shale We Review the 2010s?

By Evelyn Teel and Jim McDonnell

With the decade coming to a close, this is a perfect opportunity to look back at how the energy market has changed over the past ten years. It has certainly been a whirlwind ride, starting shortly after the 2008 stock market crash and continuing through the Great Recession and the subsequent recovery. The decade also saw the shale gas revolution take hold. Arguably the most significant change in the energy market over the past ten years, the shale gas revolution has not only provided great economic benefit within the United States but also reshaped our position on the world stage.

The two technologies instrumental to the shale gas revolution – hydraulic fracturing (i.e., fracking, or inducing porosity and permeability in rock) and directional drilling (greatly increasing a wellbore’s exposure to hydrocarbon bearing formations) – have been around for decades. However, Texan George P. Mitchell of Mitchell Energy & Development Corp., through sheer determination and personal will over seventeen years, was able to advance and combine these technologies, thus enabling the extraction of natural gas from shale formations that are of low porosity (i.e., not much pore space in the rock) and low permeability (i.e., the pore spaces are not well interconnected). These formations underlie large swaths of the United States, and the proven reserves of natural gas have consistently increased over the past decade.

The shale gas revolution is commonly considered to have started in 2008, and in the 2010s, we have witnessed the remarkable changes that have resulted from its growth. As fracked wells have come online, the ready supply of low-cost natural gas has transformed the energy industry in America and the world. The graph below on the left shows the volume of natural gas produced daily in the United States between 1997 and 2010, measured in billions of cubic feet per day (Bcf/day). Production over this period remained relatively flat, averaging about 50 Bcf/day. Compare that to the graph on the right, which shows the volume of natural gas produced in the United States from 2010 to the present. The volume of natural gas produced daily has very nearly doubled to about 93 Bcf/day.

Though demand for natural gas has increased, the more dramatically increasing supply of natural gas has driven down its price. The graph below shows how US natural gas prices at the Henry Hub have declined from about $6 per million Btu (mmBtu) to $2.19 per mmBtu today.  

Due to the increased availability of cheap, abundant natural gas, an increasing number of liquified natural gas (LNG) export terminals have come online, and the United States has become a major exporter of LNG. This reverses a long-term trend of rising LNG imports. The graphs below show US LNG imports and exports from 1985 – 2009 (left) and 2010 – 2019 (right).

In most parts of the country, natural gas prices and electricity prices are strongly correlated. As natural gas prices move so do, generally, electricity prices. Thus, as natural gas prices have fallen, electricity prices have fallen as well. The graph below shows wholesale electricity prices in the Mid-Atlantic measured in dollars per megawatt-hour ($/MWH). Wholesale electricity prices are almost half of what they were ten years ago.   

The abundance of natural gas and the declining prices of natural gas and electricity have been driven by the dramatic increase in shale gas production.  

The map and graph below identify the regions and geological “plays” in the US where shale gas production is occurring. Shale gas production has increased to two-thirds of this rising total US natural gas production from only a minor contribution only ten years ago.    

Source: US DOE EIA

Though many people doubted fracking would work with crude oil deposits, as oil molecules are much larger than those of natural gas, Mark Papa of EOG Resources, Harold Hamm of Continental Resources, and others have been able to adapt fracking technology to the extraction of oil. We have thus seen a shale oil revolution take hold, which has brought benefits similar to those of the shale gas revolution. It has driven down petroleum prices in the United States and dramatically reduced our dependence on foreign oil.  The US recently became a net exporter of oil products (refined petroleum and crude oil). Overall, the US is now the world’s largest producer of natural gas (93 Bcf per day versus 58 Bcf per day during 2010) and crude oil (13 million barrels per day versus 5.5 million barrels per day during 2010). 

The shale revolutions have significantly changed the US energy landscape over the past decade. They have brought online abundant sources of low-cost domestic energy, which have driven down consumer prices, boosted our economy, created jobs, improved America’s energy security, and increased revenue to state and local governments and the federal government. Fracking and directional drilling require a smaller footprint than traditional drilling, and have helped reduce CO2 emissions as natural gas is being substituted for coal in electricity generation. Low cost, abundant natural gas complements intermittent sources of energy such as wind and solar.

In addition to all the benefits noted above, low energy prices in the United States have expanded the manufacturing sector and made the country more attractive to companies willing to relocate from overseas. Indeed, the shale revolutions have done nothing less than improve the United States’ geopolitical position, reducing our dependence on foreign oil and shoring up our export capacity.

Like any fuel source, shale gas comes with trade-offs. There are concerns about induced seismicity, water and air pollution, and health impacts. Further technological advances and refinements in the field may alleviate these concerns, and we look forward to seeing how this industry progresses in the 2020s.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484-8096, or email us at info@avalonenergy.us.

Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

All images copyright 2019 Avalon Energy® Services LLC

Copyright 2019 by Avalon Energy® Services LLC

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Avalon Energy Services Turns 10 Years Old This Month

Late 2008/early 2009 was an unsettling time.  Bear Stearns was bailed out, Lehman Brothers went bankrupt, the housing market collapsed, credit markets were frozen, the stock market fell more than 40%, the unemployment rate was approaching 10%, and energy markets were in turmoil.  The Great Recession was underway.  Despite this uncertainty, during April of 2009, Avalon Energy Services, LLC was established. 

More than a few of our family and friends suggested we were crazy to start a business during such a difficult economic time.  We probably were.  But, with expanded customer choice and intense energy commodity price volatility, confusion was immense and we saw a clear need among energy users for independent and objective energy-related advice.  Our belief was that with a singular focus on the individual needs of energy users, we could help.  So, we set off on a mission to help commercial and industrial customers “save energy and save money.” 

Today, energy users have more options than ever for energy procurement and usage, including onsite and offsite renewable energy, energy storage, and combined heat and power (CHP), to name just a few.  Sustainability has also become a major consideration, and customers have access to numerous options for ensuring their energy usage aligns with their needs and priorities. 

Referrals from satisfied customers have enabled Avalon to grow and serve an expanded market, but we continue to maintain a singular focus on each customer’s individual needs and priorities.  The turmoil of the Great Recession may have abated, but the need for professional guidance in navigating energy usage, procurement, and sustainability has only grown.  At ten years old, we are proud to continue to provide our customers with top quality independent and objective advice based on sound economics.

Evelyn Teel wrote this article.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484-8096, or email us at info@avalonenergy.us.

Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

Copyright 2019 by Avalon Energy® Services LLC

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Propane and Natural Gas – Birds of a Feather Not Flying Together

Propane is a versatile source of energy common in rural areas that are “beyond the main” of utility natural gas service.  It is often used for home space and water heating and cooking, as well as for agricultural uses such as crop drying, irrigation pump fueling, space heating in green houses, pig and poultry brooding, frost protection, standby electricity generation, and even food refrigeration.

Where does propane come from?

Propane is produced in association with natural gas (along with other natural gas liquids, or NGLs) and is also a byproduct of crude oil refining.  Because propane is a gas at atmospheric pressure, it is compressed into a liquid state under moderate pressure for storage and delivery.

The shale gas revolution has led to dramatic increases in natural gas production.

As previously reported, US natural gas prices have remained low for some time.  This is despite the existence of many influences that more recently would have driven natural gas prices upward (see Natural Gas Market Update, June 2018).

Because propane is produced in association with natural gas, along with the dramatic increase in US natural gas production has come a dramatic increase in US propane production.  As natural gas production has increased, so has NGL production.

With such an increase in propane supply, propane prices, like natural gas prices, are low – right?

No.

While natural gas prices have remained low (red line below), propane prices have risen significantly (blue line below).

    

Why?

Exports of propane from the US have grown and continue to grow.

Conclusion

Rural residential and agricultural customers who rely on propane rather than natural gas are not benefiting from the shale gas revolution to the extent that others are in the US.  Increasing propane exports are a major driver of this phenomenon.  This is another illustration of the complicated dynamics underlying energy commodity markets and an example of how those markets can change over time, often in unexpected ways.

Note:  Evelyn Teel contributed to this article.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484-8096, or email us at info@avalonenergy.us.

Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

Copyright 2018 by Avalon Energy® Services LLC

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Natural Gas Market Update, June 2018

Natural gas prices remain low and below their declining 21-year trend.  See graph below.

The prices presented here are for delivery at the Henry Hub in Southern Louisiana.  Natural gas prices in other producing areas of the US, such as Northeastern Pennsylvania, the Permian Basin, and the Williston Basin, are significantly lower.  The prices here are also in nominal dollars.  If plotted in real dollars, the downward trend would be even more pronounced (see These are Days to Remember).

Despite the current low price environment, there are a number of factors putting upward pressure on natural gas prices, including:

  • Increasing liquified natural gas (LNG) exports
    • Cheniere Sabine Pass trains 1-4 online
    • Cove Point terminal on the Chesapeake Bay ramping up
    • 11 additional liquification trains along the Gulf Coast in the works to come online in the next five years
  • Increasing pipeline exports to Mexico
    • Up more than 300% since the Great Recession
  • Increased industrial demand
    • Particularly in the petrochemical industry
  • Increased demand for natural gas-fired electricity generation
    • As coal plants retire
  • Natural gas storage levels down
    • Currently 25% below five-year average at this time of year

Given these influences, how do natural gas prices look in the futures market?  Low and continuing their decline.  See the graph below.

After peaking at $3.16/mmBtu during the winter of 2018/2019, natural gas prices remain below $3/mmBtu for the remainder of the 60-month forward period.

What is driving this?

Supply.  More specifically, dramatically increasing supply.

Natural gas production is up 7 Bcf/day from this time last year to 79 Bcf/day.  The US Energy Information Administration (EIA) projects US natural gas production will reach 83 Bcf/day by December 2018.

To see how much things have changed, read these older natural gas market updates:

Natural Gas Market Update October 2014

Natural Gas Market Update November 2013

Natural Gas Prices – Time to Hit the Panic Button?

Natural Gas Price – Looking Ahead January 2012

Natural Gas Price Drivers (January 2012)

As a result, natural gas (and electricity prices) are currently attractive—making this a good time to consider locking in your supply needs.

Note:  Evelyn Teel contributed to this article.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484-8096, or email us at info@avalonenergy.us.

Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

Copyright 2018 by Avalon Energy® Services LLC

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NCAC – 22nd Annual Washington Energy Policy Conference

ONE WEEK FROM TODAY

Secure your spot here: https://www.ncac-usaee.org/event-2845352

Energy Technologies and Innovations: A Disturbance in the [Market] Force

Thursday, April 12, 2018, 8:30 AM to 6:00 PM

The George Washington University

Keynote speakers:

Mark P. Mills, Senior Fellow, Manhattan Institute

Gil Quiniones, President and CEO, New York Power Authority

In addition to these keynote speakers, the following panels will be held:

PANEL 1: The Grid Awakens: Electricity Generation and Demand
Phil Jones, Executive Director, Alliance for Transportation Electrification
Bryce Smith, Founder and CEO, LevelTen Energy
John Zahurancik, COO, Fluence
Barney Rush, Board Member ISO New England, Rush Energy Consulting (moderator)

PANEL 2: Hydrocarbons Strike Back: Innovations to Maintain the Status Quo

John Eichberger, Executive Director, Fuels Institute
Sid Green, President, Enhanced Production Inc.
Mike Trammel, Vice President for Government, Environmental, and Regulatory Affairs, Excelerate
Rita Beale, CEO and President, Energy Unlimited (moderator)

PANEL 3: Innovation: A New Hope in Energy

Bill Farris, Associate Laboratory Director for Innovation, Partnering, and Outreach, National Renewable Energy Laboratory
Elisabeth Olson, Economist, Office of Energy Policy & Innovation, FERC
Christopher Peoples, Managing Partner, Peoples Partners and Associates
Devin Hartman, Electricity Policy Manager, R Street Institute (moderator)

PANEL 4: Return of Energy Policy

Adele Morris, Policy Director for Climate and Energy Economics, Brookings
Jason Stanek, Senior Counsel, House Energy & Commerce Committee, Subcommittee on Energy
Pat Wood, Chairman, Dynegy
Kevin Book, Managing Partner, ClearView Energy Partners (moderator)

Note: Chatham House Rules apply.

Full Agenda and to register –> http://www.ncac-usaee.org/events.php#event151

RSVP: Required

Conference Information:

Organizer: Michael Ratner, NCAC-USAEE Vice President (mratner@crs.loc.gov) / 202-707-9529
Venue: The George Washington University, The Marvin Center, 3rd floor, Continental Ballroom, 800 21st Street, NW, Washington, DC 20052

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In The News – Avalon Energy Services, LLC

In his year-end review titled, “Gas Industry Looks Optimistically at 2017,” PointLogic author Kevin Adler quotes our COO, Jim McDonnell.  Scroll down to the bottom of the report which you can find here.

The Avalon Advantage – Visit our website at www.AvalonEnergy.US, email us at info@avalonenergy.us, or call us at 888-484-8096.

Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

Copyright 2017 by Avalon Energy® Services LLC

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Natural Gas and Electricity Are Parting Ways – Part 2

In our last article, Natural Gas and Electricity Are Parting Ways – Part 1, we explored the weakening correlation between wholesale natural gas prices and electricity prices in the Mid-Atlantic.  While natural gas prices have fallen dramatically over the past seven years, and electricity prices have fallen as well, electricity prices have not fallen as far.  We discussed how this weakening relationship is, in part, a result of natural gas-fired generating units more and more often being dispatched before coal-fired units.  In this article, we look at the influence of capacity prices.

Capacity

The cost of energy delivered by a competitive supplier consists of several elements—generation, capacity, transmission, and ancillary services.  Costs to suppliers resulting from PJM’s energy auctions are reflected in competitive suppliers’ generation charges.  Competitive suppliers are also required to own or to reserve generation capacity.  PJM runs separate capacity auctions to place a price on this capacity.  These auctions establish capacity prices for each of the three consecutive future planning years.

Polar Vortex 

During the depths of the Polar Vortex of January 2014 (see What Does Volatility Look Like?), there were times when more than 20% of generation capacity in PJM was unable to respond when dispatched by the grid operator.  The grid operator then had to call upon non-economic (meaning more costly) resources to fill in, some of which also were unable to respond.  The grid came within a few thousand megawatts of brownouts, and prices soared to more than $2,600 per megawatt hour during some hours.

Capacity Performance

Clearly more reliable generation capacity was required.  PJM proposed, and the Federal Energy Regulatory Commission (FERC) approved, a change in regulation creating a new Capacity Performance product.  With Capacity Performance, PJM established new, more stringent requirements for generation regardless of weather conditions and system conditions, and also established onerous penalties in the event that generation does not respond when called.  Most generators bid their capacity again during two Transitional Auctions, for the planning years 2016/2017 and 2017/2018. As a result, due to this change in regulation, capacity prices have been reset higher for each of these two planning year periods.

The table above presents, for the 2016/2017 and 2017/2018 planning years, capacity prices that were originally established as part of Base Residual Auctions (BRA) and the new prices established as part of Capacity Performance (CP) Transition Auctions.

Additional investment was clearly needed in order to improve system reliability.  PJM’s strategy with Capacity Performance is, on the one hand, to provide generators “resources to invest in improvements in such areas as dual-fuel capability, securing firmer natural gas supplies and upgrading plant equipment,” while, on the other hand, imposing substantial penalties for non-performance.

These increased costs associated with Capacity Performance, which will be reflected in electricity prices, are unassociated with changes in natural gas prices and are another driver of the decline in correlation between electricity prices and natural gas prices.

Notes:

– Evelyn Teel contributed to this article

– Capacity prices and quote from PJM website

The Avalon Advantage – Visit our website at www.AvalonEnergy.US, call us at 888-484-8096, or email us at jmcdonnell@avalonenergy.us.  Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.  Copyright 2015 by Avalon Energy® Services LLC

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Natural Gas and Electricity Are Parting Ways – Part 1

In recent articles, we have explored the dramatic decline in natural gas prices over the past seven years.  See These Are Days To Remember and 10,000 Maniacs Were Right.

In the US Mid-Atlantic, natural gas and electricity prices have, over time, tended to move together.  While there has by no means been a perfect correlation between the two, the relationship has been strong.

Over the past 15 years, the coefficient of determination (R2) has averaged about 67% (see yellow line).  In other words, over this time period, 2/3 of the change in electricity prices can be explained by changes in natural gas prices.  More recently, however, the strength of this relationship has weakened and continues to weaken further (see red line).  Electricity prices have declined but not as precipitously as those of natural gas.

Why has this relationship weakened?  Two significant drivers relate to (i) dispatch order and (ii) capacity prices.

Dispatch Order

In scheduling energy to serve electricity users, the grid operator, PJM, utilizes a least-cost dispatch model.  PJM develops an expectation of projected system load on an hourly basis and then seeks bids from generators to supply energy to serve this load.  After bids have been submitted, for each hour, PJM accepts the lowest cost offers first and then works their way through higher price offers until sufficient supply has been cleared to match the projected load.  (There are a number of system constraints and complications that must be incorporated into the process, but this pretty much captures it.)  For each hour, the price at which the last megawatt-hour (MWh) clears sets the price for all the supply offers that clear in that hour.

For many years, the last generating units cleared were generally natural gas-fired units.  As a result, it has been these natural gas units that have set the price for electricity, leading to the strong link between natural gas prices and electricity prices.  A common understanding was that “as natural gas prices go, so go electricity prices.”

But now, low natural gas prices are leading to lower and lower supply bids by natural gas-fired generators, causing them to more frequently fall down the dispatch order and clear before coal-fired units.  Because of this, coal fired units are now more often becoming the marginal, or price-setting, units.  And, as a result, falling natural gas prices have not driven down electricity prices to the extent they once would have.

In addition to procuring energy, electricity wholesale suppliers must also own or procure capacity.  In our next article, we will look at how capacity costs influence electricity prices.

Evelyn Teel contributed to this article.

The Avalon Advantage – Visit our website at www.AvalonEnergy.US, call us at 888-484-8096, or email us at jmcdonnell@avalonenergy.us.  Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.  Copyright 2015 by Avalon Energy® Services LLC

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10,000 Maniacs Were Right

The dramatic decline of natural gas prices was the focus of our last article (These Are Days to Remember).  As we noted then, in real dollars, natural gas prices were near all-time lows.  Since then, natural gas prices have continued to fall.

Yesterday the November futures contract settled at $2.033 per mmBtu.  The last time the November contract was this low was 17 years ago in 1998, when it closed at $1.97 per mmBtu.

The “winter strip” is the simple average of natural gas futures prices for the five month period of November, December, January, February, and March.  These five months represent the winter heating season, when demand for natural gas is historically the greatest and natural gas prices, correspondingly, are generally highest.

With the rolling off of the November contract yesterday, the 2015/2016 winter strip closed out at $2.349 per mmBtu.

The graph below puts this into perspective by comparing the current winter strip (in red) to that of previous winters.

Incredible.  These are days to remember.

Evelyn Teel contributed to this article.

The Avalon Advantage – Visit our website at www.AvalonEnergy.US, call us at 888-484-8096, or email us at jmcdonnell@avalonenergy.us.  Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.  Copyright 2015 by Avalon Energy® Services LLC