Washington Wants Natural Gas: The Inevitability Of Favorable Legislation

Includes: CHK, DUK, EXC, PPL, SO, XOM
by: Blake Tyler

While market forces undoubtedly play a role in a nation's energy infrastructure, policy has proven instrumental in establishing a framework for utility expansion and energy production. The most recent initiative proposed by the Senate is a bill that amends the 1978 Public Utility Regulatory Policies Act (PURPA). Senate Bill 2146, The Clean Energy Standard Act of 2012, is designed to stimulate energy innovation and to promote the installment of low emission alternatives to dirty coal and petroleum. It requires utilities to purchase a percentage of their electricity from clean sources beginning in 2015, and incentivizes long-term investment in cleaner technology. Yet most importantly, the legislation would have positive implications for natural gas. In addition to renewable sources, its definition of clean energy encompasses natural gas (including coal mine methane), and clean coal plants [Senate Bill 2146. pg. 2-3].

This policy reflects a global trend to transform energy infrastructure. In the developing world, economies have increasingly demanded a higher standard of living, and as a result have come to require more electricity to meet their daily needs. For example, China's 2005 Renewable Energy Laws institute guidelines for addressing a changing energy landscape [The Renewable Energy Laws of The People's Republic of China. Chapter 3]. In developed countries, over the past decade there have been government efforts to modernize electricity generation and promote self-sustainability. Denmark's Smart Grid installations and American renewable energy subsidies are manifestations of policy initiatives designed to transform energy production and distribution. Senate Bill 2146 is simply the most recent of political efforts to promote this transformation. In his testimony before the Senate Committee on Energy and Natural Resources regarding this bill, Keith Trent, Group Executive and President of Duke Energy (NYSE:DUK) Commercial Business stated,

The electricity sector is on the cusp of a massive, new investment cycle. Out of approximately 300,000 megawatts of coal fueled electric generation in this country, about 100,000 MW is as old or older than most of us in this room. Compared to newer power plants, these older units - predominantly coal-fueled - are generally smaller, less efficient and more expensive to run. [Trent, Keith. pg. 2.]

His statement illustrates an opportunity presented by the immediate need for a national energy restructuring. Given inadequate coal facilities, how polices manipulate the energy market will influence the nation's future means of energy production and distribution. This policy's classification of natural gas as a clean energy source suggests that the government prefers natural gas as a primary replacement for dirty coal.

The inclusion of natural gas in the 2012 Clean Energy Standards indicates that it holds a special place within the American economy. While partially a political effort to establish bipartisan support, promoting natural gas as a source of clean energy reflects the realization that given its low cost and abundance, natural gas ought to play a role in America's energy future. In fact, one of the bill's primary criticisms is that it places too much emphasis on natural gas, and discourages alternative investment and development. Trent worries "construction of new nuclear units - which we know are highly competitive in the long run - and zero-emission wind and solar power plants will suffer if Congress gives natural gas another leg up." [Trent, Keith. pg. 3.] The EIA projects that given the low price and availability of natural gas, the bill or similar legislation could generate up to a thirteen percent production increase above the baseline forecast for 2020 [EIA Releases Study on Proposed Clean Air Standard].

While chances of this bill going through in its current form appear slim, it reflects a political trend that will undoubtedly shape future energy markets. With social, political and economic interests demanding homegrown energy, any future amendment to PURPA will likely include a provision promoting natural gas. Government efforts to promote clean energy are not new. Over the past two decades the Production Tax Credit and the Investment Tax Credit have increased renewable energy investment and development. By defining "clean energy" to include natural gas, the government is supporting yet another alternative to dirty coal and oil. Given the renewable industry's recent growth, government backing will substantially expand natural gas's market within the American energy grid.

How to play it

Recognizing that natural gas is going to play a large role in America's energy future is an important first step. Whether you're a left wing environmentalist or a conservative coal mogul, you're going to need to come to terms with this. T. Boone Pickens' characterization of natural gas as bridge fuel is apt, and regardless of where our energy future lies natural gas is likely to get us there. Utilities such as Exelon Corporation (NYSE:EXC), The Southern Company (NYSE:SO) and PPL Corporation (NYSE:PPL) that have transitioned to natural gas plants stand to benefit in the long-run as do the two largest American producers of natural gas, Exxon Mobil (NYSE:XOM) and Chesapeake Energy Corporation (NYSE:CHK). According to Bloomberg, Just in the past year gas fired consumption has risen by nearly six percent [Drajem, Mark. Doom, Justin]. While low natural gas prices threaten short term profit margins, natural gas utilities and producers are well positioned to take advantage of favorable policy. This is a long term play but is based on the likely assumption that the government will facilitate a national transition to natural gas.

Disclosure: I am long XOM, DUK, PPL.