Accounting for Fuel Price Risk: Using Forward Natural Gas Prices Instead of Gas Price Forecasts to Compare Renewable to Natural Gas-Fired Generation

Accounting for Fuel Price Risk: Using Forward Natural Gas Prices Instead of Gas Price Forecasts to Compare Renewable to Natural Gas-Fired Generation

TitleAccounting for Fuel Price Risk: Using Forward Natural Gas Prices Instead of Gas Price Forecasts to Compare Renewable to Natural Gas-Fired Generation
Publication TypeReport
Year of Publication2003
AuthorsMark Bolinger, Ryan H Wiser, William H Golove
Pagination89
Date Published08/2003
InstitutionLBNL
CityBerkeley
Keywordselectricity markets and policy group, energy analysis and environmental impacts department
Abstract

In this report we compare the cost of hedging natural gas price risk through traditional gas-based hedging instruments (e.g., futures, swaps, and fixed-price physical supply contracts) to contemporaneous forecasts of spot natural gas prices, with the purpose of identifying any systematic differences between the two. Although our data set is quite limited, we find that over the past three years, forward gas prices for durations of 2-10 years have been considerably higher than most natural gas spot price forecasts, including the reference case forecasts developed by the Energy Information Administration (EIA). This difference is striking, and implies that resource planning and modeling exercises based on these forecasts over the past three years have yielded results that are biased in favor of gas-fired generation (again, presuming that long-term price stability is desirable). As discussed later, these findings have important ramifications for resource planners, energy modelers, and policymakers.

LBNL Report Number

LBNL-53587

Refereed DesignationUnknown