Four independent events in the energy area are causing investors to consider an interesting investing strategy. The first event is cheap natural gas at Marcellus. The second event is the inability to build natural gas pipelines to major markets. The third is coal's rapid exit from the power markets. The fourth is a growing shortage of capacity in the nation's Eastern power markets. Connecting the dots has caused investors to develop a strategy that allows them to sell natural gas by wire.
A gas-by-wire strategy avoids building additional pipelines when there are adequate transmission lines. While pipelines and transmission lines are difficult to build in high-population centers, today it is easier to upgrade existing wires than it is to upgrade existing pipes. Today, billions of dollars of transmission-line upgrades have been approved, while only a handful of pipelines have been financed.
While some traders focus on Henry Hub prices, natural gas trades at different prices at different locations. The Federal Energy Regulatory Commission reports that the price differences in 2013 between Henry Hub and New England frequently exceeds $5 per million British thermal units (MMBtu). Several times, the differential exceeded $20 per MMBtu.
At the same time, the Energy Information Administration (EIA) is reporting that natural gas price futures for the Marcellus region are below the benchmark at Henry Hub. You can see the forward price curve to Jan. 1, 2017, by viewing EIA's "Today in Energy" report: "Markets expect Marcellus growth to drive Appalachian natural gas prices below Henry Hub."
Sustained price differentials will drive investments in new pipelines, but the process is time-consuming and costly. Up to now, the priority has been to serve the greater New York City area. As the Northeast Gas Association argues, in order to build new pipeline capacity, customers must be willing to execute firm transportation contracts so developers can cover the required capital investment and operating costs. Without such commitments, pipeline projects cannot proceed.
The Boston Globe reports that Northeast Utilities (NU) and National Grid (NGG) signed an agreement that will allow Spectra Energy (SEP) to invest $850 billion and expand its Algonquin Gas Transmission pipeline. Kinder Morgan (KMP) is also planning to add to another pipeline system, called the Northeast Expansion Project, which would add to its existing Tennessee Gas Pipeline system. For the long term, this is good for all companies involved. However, these projects require FERC approval and the approval of state regulators. In New England, the approval of state regulators is no easy task.
When it comes to anything energy in New England, investors can expect regulatory inertia. The trouble is not the regulators; it is their interveners. Interveners want New England to shutter its power plants. They do not want transmission lines. With respect to natural gas pipelines, the Globe quotes Boston's nonprofit Conservation Law Foundation as saying, "Significant expansion of natural gas infrastructure is going to put us on a collision course with blowing past our climate mandates. It's not close to what we need to get to the level of greenhouse-gas-emissions reductions that we need to hit."
Last week, the New England's market paid over $300 for a megawatt-hour of power. Merchant generators could not find enough natural gas to fuel their power plants.
Here is how the events come together
The Northeast is short of natural gas. The Marcellus region is drowning in natural gas. A pipeline connecting these regions would take years to build. While it would take a lot of moxie, a developer could build a gas turbine in the Marcellus area and sell its power in New England.
It turns out there is a company willing to take the risk. It is Connecticut-based Moxie Energy LLC. Moxie provided early stage development for an 829-megawatt combined cycle gas turbine called Liberty. The turbine is manufactured by Siemens (SI), and it will be delivered to Bradford County, Penn. It will be adjacent to transmission lines and on top of Marcellus wells.
Moxie sold its project to Panda Power Funds, a Dallas-based private-equity firm. Panda's equity was pared with debt provided by Goldman Sachs (GS), Credit Suisse (CS) and Ares Capital (ARCC) to finance the $1.2 billion project. It will go on line just after coal exits in 2016.
Assuming Liberty was able to contract gas below $4.00, production numbers are impressive. At less than $22.50 per megawatt-hour, Liberty can produce power below the average cost of nuclear power, coal and conventional gas turbines.
Liberty is one of the nation's first large-scale projects built on speculation. While other projects, including wind and solar, require power purchase agreements or other long-term hedging arrangements, Liberty is responding to the markets. As such, it is aptly named.