On paper, all seven actively traded North American power markets have enough supply to meet the summer peaks that have been forecast. But the edge is so thin that any long periods of summer heat could cause price hikes in the market. That’s the conclusion of Barclays Capital Research analysts Michael Zenker and George Hopley. Of the seven markets, only Alberta is a winter-peaking region. “Before summer officially arrived, Texas hosted the first power spikes of the year,” Zenker says. “While structural issues in the market exacerbated them, an underlying tight supply and demand balance was evident. Texas is not unique.” He adds that even if the markets avoid price spikes, a combination of gas increasingly setting prices and scarcity premiums growing in several market regions means that power prices and generator margins will likely be higher this summer than last. According to the U.S. Energy Information Administration, during the week ending July 4, estimated net injections of gas into underground storage totaled 90 billion cubic feet. Working gas in underground storage as of July 4 was 2,208 billion, which is 3.1% below the 5-year average. “Unfortunately for power consumers, these spikes may be just what are needed to boost forward prices,” Zenker says. “Just as each of us may find over the next few months that the first exposure to prolonged sunlight can cause sun burn, the same is true for the power markets: prolonged exposure to hot weather may cause surprises in the power market. “ Yet forward prices do not fully reflect this risk. In fact, they lag the levels necessary to cover new build costs for new gas-fired power plants. Until prices cover new build costs, expect supply to lag demand.” This situation does present an opportunity for investors, he says. Zenker adds that power margins must grow to encourage new development. While margins could sag on mild weather, there is much more upside potential than downsize risk for forward spark spreads. “With markets clearly in need of new supply, the fuel choice for the next round of power plant additions will shape fuel demand and power prices for decades ahead,” Zenker says. “Despite a concerted effort by several power market regions and utilities to diversify the fuels used in new power plants, we expect natural gas to dominate new base-load plant construction and wind to dominate the renewable category. The reason is fairly simple: the alternatives are struggling.” He adds that gas-fired plants have held the cost-advantage high ground for years. This is because of low operating and capital costs and rising costs compared to the next two competitors—coal and nuclear. “However, the surge in natural gas prices, where the three-year forward strip for gas is at all-time record highs, has effectively pushed power prices high enough to cover coal and nuclear plant costs,” Zenker says. “Note that gas-fired plants are not cost effective in any market region at current forward prices.” There is another however, he says. “The regions where coal and nuclear plants are cost effective are among those least likely to embrace either of them,” Zenker says. “Last and most important, a pullback in gas forwards will quickly undermine the economics of new coal and nuclear plants. Thus, it is clear that the cost-effectiveness of coal and nuclear plants rests chiefly on one factor: gas prices.” The bulk of the remaining proposed power plants are from renewable resources, dominated by wind, Zenker says. The default fuel choice for the coming round of base-load power will again be gas-fired, he says. Gas, Zenker says, will remain the fuel of choice or necessity for the near future. –John A. Sullivan, News Editor, Oil and Gas Investor, www.OilandGasInvestor.com, jsullivan@hartenergy.com