"Cheap Natural Gas Lures Private Equity to Power Industry"

From Bloomberg:

The companies most bullish on U.S. power aren’t from the energy industry. 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 14.5 cents to $3.779 at 1:18 p.m.

Higher Production
Natural gas futures added 2.1 cents to $3.655 per million British thermal units in electronic trading on the New York Mercantile Exchange at 11:59 a.m. Singapore time. The heating fuel has lost 14 percent this year.
Natural gas plants are being built to replace about 12 gigawatts of mostly coal generation in the mid-Atlantic grid managed by PJM. The plants are slated to shut through 2015, driven by new environmental standards on toxic air emissions.

“There’s a huge amount of generating capacity that’s coming offline,” said John Breckenridge, managing director at Capital Dynamics, a Zug, Switzerland-based company that invests in private equity. “You’ve got a lot of gas within PJM now because of the Marcellus shale, primarily. So gas-fired power plants are very attractive investments.”

Raising Money
The private equity companies are constructing the most efficient gas plants, which, near the Marcellus shale, may see a profit margin of $21.72 a megawatt-hour in January, based on gas deliveries at the Tetco M3 hub in PJM, according to data compiled by Bloomberg yesterday. That compares with a margin of $2.18 for the average combined-cycle plant in the area, and a loss of $30.38 for the least efficient gas units....MORE