US power generators should sign long-term contracts with natural gas producers to lock in low gas prices and save consumers billions of dollars, the pro-gas group American Clean Skies Foundation said Monday.
"The prudent use of some longer term gas supply agreements can reduce risks for gas suppliers, electricity generators and customers alike," Gregory Staple, the CEO of ACSF, said in statement.
The report outlines a number of steps to encourage long-term contracts between gas suppliers and power generators. The report was also released Monday at a meeting of the Mid-Atlantic Conference of Regulatory Utilities Commissioners in Hershey, Pennsylvania.
ACSF is a nonprofit advocacy group that Chesapeake Energy set up in 2007 to promote gas.
For years, coal power plants have relied on multi-year coal supply contracts that give them "substantial certainty" about their future operating costs, the ACSF report said.
Gas-fired power plants should take the same approach, but a couple of components are needed to make it work, ACSF argued.
First, gas supply agreements and hedging arrangements should share the risk of future price changes between gas suppliers and power generators, ACSF said. For example, contracts could provide a percentage of the gas at a fixed price and a percentage at the market price, the group said.
Second, state regulators should change their system for authorizing utilities to recover gas costs, according to ACSF. For instance, regulators should not allow a utility to pass through the cost of spot gas purchases if a longer-term contract would have been a better approach, it said.
Power plants must also be willing to sign firm agreements with pipelines to deliver the gas, ACSF said. "Any long-term commitment an electricity generator makes to gas suppliers must be matched with an equal commitment to pipeline providers," it said.
However, power plants should not rely solely on long-term contracts for their gas supply, ACSF said. "We believe generators and natural gas producers should supplement their current strategies with long-term agreements as a way to reduce costs and risks, while also increasing resource diversity and certainty," it said.
This approach would save energy consumers money, ACSF said. "According to the Energy Information Administration, the domestic electricity sector will spend $330 billion for natural gas between 2013 and 2020," ACSF said.
"If just 25 percent of this expected demand is met through long-term contracts based on today's low price horizon, electricity users can save $16 billion for every $1/MMBtu that such contracts are below average spot prices," it said.
