Cheap Natural Gas Lures Private Equity to U.S. Power Industry

liquid-natural-gas-storage-tank_300x222Business News Network

By Jonathan N. Crawford and Naureen S. Malik

The companies most bullish on U.S. power aren’t energy companies. They are private equity firms and here’s why: natural gas.

Firms from Panda Power Funds to Energy Investors Funds are financing about 10 gigawatts of new gas-fired plants over the next five years in the 13-state mid-Atlantic grid. That’s enough power to run New York City on all but the hottest summer days. Traditional power companies are building less than 4 gigawatts. Part of the electric grid sits atop the Marcellus shale formation in Pennsylvania, which supplies 18 percent of U.S. gas production, up from 1.8 percent in 2007.

Gas from the Marcellus shale deposit is helping boost U.S. production to a record for a fourth year. Growing supplies have cut gas prices in half over the past six years, double the drop in power, leaving investors with a healthy profit margin. Gas plants will account for about 27 percent of U.S. power output this year, up from 21 percent in 2008. Coal’s share dropped to 39 percent from 48 percent.

“The bet, if you will, that private equity seems to be making is that low gas prices in the Marcellus region will give them an advantage,” Swami Venkataraman, vice president and senior credit officer for infrastructure finance at Moody’s Investors Service Inc. in New York, said yesterday by phone. “They’re able to get an extra kicker in terms of their profitability by doing so.”

Henry Hub gas futures have averaged $4.31 per million British thermal units this year, down 52 percent from the same period in 2008. Power in PJM Interconnection LLC’s Western hub, a regional benchmark, is down 23 percent. Futures on the New York Mercantile Exchange rose 5.2 cents to $3.686 at 8:07 a.m.

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