This past week wasn’t all that interesting. This coming week will be.

Prices bounced around a bit, but more or less stabilized around $3.50 following last Thursday’s precipitous drop, which came hot on the heels of last Thursday’s storage report. One can feel, however, the pull of a gradual slide towards the $3.00 mark. Considering that the fundamentals of the natural gas market, the outlook for the national economy and the forecast for the global economy haven’t changed all that much from where they were last week, or the week before that, or the month before that, this is entirely predictable.

It may have nothing to do, however, with what happens to natural gas prices this week. Because this week marks the turn from May into June, and funny things have been happening to the NYMEX price when the end of the month comes around. It will be worth watching to see whether this turnover is “funny” or not.

We’ll promise you one thing: nobody knows for sure.

It’s been interesting reading the market analysts these past few months as they try to come to terms with 2008. This past year saw the natural gas market endure greater volatility than ever before in its history, and also saw it follow a path that completely contradicted traditional market predictors: prices rose like a rocket during the summer, then plummeted during the winter.

And while most analysists have stuck to their guns in explaining the market according to traditional market fundamentals, each week brings a new onset of head scratching.

At Cost Containment Intl., we think they actually know the answer. They just don’t like it.

We’ve written many times in the past about the role that speculation is playing in the energy markets. Speculation is a fairly new factor for energy, and it’s a factor that has changed radically in the last few years due to the influx of a new generation of investors and fund managers. They have littler aversion to risk, they’ve enjoyed a taste of quick, easy profits, and they have little patience. They are undeterred by the fact that they’re not schooled in the fundamentals. They don’t mind playing fast and loose, especially when they’re playing with other people’s money.

In other words, they’re completely unpredictable. They tend to rush in and rush out (as we’ve seen over the past couple of months), leaving no more than tantalizing clues as to what started the rush. They amplify small price trends into major bumps. And in the process they have added a level of complexity to predicting the market which no one, as yet, has come to grips with. Most analysts are either leaving them out of the equasition or minimizing their impact.

What this means to you. We’ve said in the past that managing energy costs requires the combined skills of an engineer, an economist, a geologist, a climatologist, and a political scientist. Looking ahead, you’ll have to be a psychologist, as well. While it is doubtful that market factors will converge again into the “perfect storm” that was 2008, it’s not out of the question. Nothing is out of the question right now.

There is one factor, however, that you can predict and even control: your own tolerance to risk. This is a good time to take your own pulse, know your own mind, and set up an energy plan that matches your personality. Because the decisions won’t be getting any easier. We’re here to help.

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I was watching one of those “World’s Most Amazing Videos”-type shows the other day, and saw a video where a bungee jump almost went disastrously wrong, with a television crew there to catch the whole thing. I don’t remember exactly what happened during the jump…there are an awful lot of these videos of extreme stunts going wrong on television these days…but I do remember what the jumper said to the television interviewer after they got safely to the ground.

The interviewer asked whether, in retrospect, the jumper would rather not have risked the jump.

The jumper responded that, even knowing what they now knew, it would still have been worse to go through life never knowing whether they had the courage to actually take the jump.

This story encapsulates everything you need to know about the risks you face as a customer in today’s energy market.

While there are all kinds of hedges available to you…and at Cost Containment Intl., we are strong advocates of hedging whatever energy plan you choose…your energy plan will be based on one of two basic approaches. You can lock in a fixed rate. Or you can ride the market with a variable rate.

The choice is traditionally presented as being fixed=no risk, variable=risk. Looking back at 2008 and the lessons it taught us, we need a new way to look at risk. As the bungee jumper shows us, it’s really a question of what kind of risk bothers you the most.

Fixed rate plans offer predicability. Stay within your contracted usage, and you’ll know exactly what your energy costs will be for the length of your contract.

Variable rate plans offer flexibility. If you’re positioned to control use, you can maximize your savings and minimize your loss by matching highest use to lowest price.

With a fixed rate plan, the risk you run is that you’re going to see prices dip below your fixed rate and regret the flexibility you no longer have. The sure price is not the sure bet.

With a variable rate plan, you run the risk that prices will go high and then keep going higher, and regret the fixed rate you could have locked. The water is often deeper than it looked when you dove in at the shore.

As 2008 has shown us, we are entering a new age of volatility in energy prices, when traditional predictors and traditional patterns are not as reliable as they once were. Which means that you, the consumer, must develop a new understanding of your own tolerance to risk.

It starts with a simple question. Which would bother you more: the risk you took and lost, or the risk you never dared to take? When you know the answer, you will have the foundation for the right energy plan for your future. Cost Containment Intl. is ready to help you find the right answer.

What we’re hearing is a great big settling sound. That would be NYMEX natural gas prices heading, bit by bit, back down to where they belong.

You can only ignore the facts for so long. Or, in the case of NYMEX, the fundamentals. And whoever triggered the price jump that got May off to such a riotous start has gradually been coming to their senses.

There’s plenty of gas. There’s going to be plenty of gas for quite some time now. The “bottom” which everyone is looking for is, most likely, a trough that will extend into 2010, and it’s still a bit early to be getting in ahead of the eventual rise.

The past two weeks have seen a gradual downward trend from our latest example of irrational exuberance. The NYMEX broke below $4.00 on Tuesday, following two weeks of steady decline, and has been bouncing around the $4.00 mark ever since…

…up until now. The weekly storage report was released just a few minutes ago, and…big surprise here…it shows a larger than expected injection. This has…big surprise again…taken what little wind was left out of the sails of even the most exuberant speculators. NYMEX is now busy falling off a cliff, to a new low around $3.65. There’s no reason to believe, however, that this is as low as we’re going to go before we go up for real.

What this means to you. Once is a paradox, twice is a trend. We’re going to see bounces like this in NYMEX right up to the point that the actual recovery begins. Count on it. There are a lot of people out there, with a lot of money to spend, who are anxious to be the “first ones in” on the inevitable rise in natural gas prices. A lot of them are not traditional energy investors, and they don’t necessarily know or follow the traditional rules of the market. They have a lot of faith in their own smarts, and they take great pride in thinking “outside of the box.” If the market fundamentals say prices are going nowhere but down, they will look for signs outside of the market that say NOW is the time to think up. They don’t just want to be richer than you are, they want to be smarter as well.

And they’re going to stick to this plan no matter how many times they end up licking their wounds after jumping too quickly.

Sooner or later, they’re going to be right. And that means that the inevitable recovery of NYMEX natural gas prices is going to begin with a bang. If you’re sitting on your energy future, waiting for NYMEX to hit that best bottom, understand that the bang this time was a shot across your bows. Don’t get left behind.

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To recap: we’re stuck in the mid-90s. A move is afoot to promote the use of green energy as a way to combat not global warming but acid rain. The conditions: the solution must involve minimum government intervention and maximum free market forces, because in America in the mid-90s, free markets are how you solve problems. The complication: free markets say green energy is going to lose, because green energy is the priciest option in a very price-sensitive market.

Installation costs for wind turbines are a large part of the reason why wind power has trouble competing.

Why is green energy expensive? High construction and installation costs combined with low, slow payback. While day-to-day generation costs for green energy are small to negligible, and the fuel source itself is free, construction requires a substantial amount of upfront investment. Investors must be paid off in a reasonable timeframe or they will invest elsewhere.

Unfortunately, green energy generators don’t operate at the high level of output that fossil fuel plants do. Fossil fuels are very good at producing high levels of output, which is why they became the dominant fuel source in the first place. Green energy generates at a more moderate pace. So in order to hit a payback level that keeps investors happy, green energy must set a high price to compensate for its moderate pace. In a truly free market, green energy will always be the last chosen.

Renewable Portfolio Standard (RPS) regulation solves this problem by forcing utilities to use a set amount of expensive green energy. But RPS regulation flew in the face of the free market ideals behind deregulation, so RPS by itself was not going to be palatable to the American voting public.

Was there instead, perhaps, a free market solution?

There was, and it involved something called commoditization. This is a another free market idea: that anything with value can be measured, broken up, and turned into a commodity that is bought and sold on the open market, like a stock or an option.

In the case of green energy, the commodity was its environmental benefit: all of the mining or drilling that don’t take place to obtain it, the pipelines and supertankers that aren’t needed to transport it, and the pollutants that aren’t released into the atmosphere when it is used to generate electricity.

Before free market thinking was applied to energy generation, we took that benefit for granted. RECs turned that benefit into something that green energy providers could sell.

RECs give green energy a way to turn its environmental advantage into a competitive advantage. Click the image to see a larger version.

This was a pretty radical idea at the time…it’s still an idea that confuses a lot of people.  But when you think about it, it makes sense. Commoditizing environmental impact is about making the energy market truly fair.

Remember, the utility is only going to accept enough electricity to meet demand, so if one plant doesn’t feed the grid, another one will. And in the language of the free market, each power plants actually produces TWO products: electricity and emissions. If you’re going to pay everyone the same price for their electricity, then a fair market dictates that you have to allow each plant the same amount of emissions as well. This hadn’t been the case before. The assumption had been that green energy produced “no” emissions. Free market thinking challenged that assumption.

Some economists called the pre-REC energy market, which assigned no measurable cost to environmental impact, “the greatest market failure in history.”

In the new plan, every plant was given an emission allowance. For every megawatt of electricity, they were allowed a certain amount of emissions.

When fossil fuels generate a megawatt of electricity, this emission is full of pollution, including greenhouse gases. The emission from natural gas is pretty dirty; the emission from oil is worse; the emission from coal is the worst. Green energy sources gives you the same megawatt of electricity, but their emission is completely clean. Which would you buy?

Under the new plan, green energy providers were allowed to package their clean emission allowance into a commodity called a Renewable Energy Certificate, or REC. Sale of the REC would act as a subsidy for the green electricity, because the green energy provider could now sell their electricity at a lower, competitive price and use the REC sale to make up the difference.

Exact definitions vary from state to state and organization to organization, but a Renewable Energy Certificate (also called a Renewable Energy Credit or Green Tag) is best described as the “environmental attributes” of one megawatt hour of electricity generated by a clean, green energy source. A green energy provider is allowed to sell one REC for every megawatt hour they feed to the local electric grid. The energy sources which are allowed to use RECs are:

• Solar electric
• Wind
• Geothermal
• Low Impact Hydro (facilities that run without requiring dams and other structures that alter water flow)
• Biomass, biofuels and landfill to gas
• Certain hydrogen fuel cells

A REC has a set life span: generally, within the calendar year in which the electricity was generated, plus a few months on either end. After that, it is retired. RECs can be purchased by utilities, or by certified brokers who then resell them. Brokers may break their RECs down into smaller units, as small as 100 kilowatt hours, and sell these REC packages, or REC blocks, at prices that small buyers, like individual people, can afford. Community Green Energy has packaged our RECs at a number of sizes, appropriate for both individuals and businesses.

Clean, green wind is one of the power sources allowed to sell RECs.

When you purchase a REC, you can claim the environmental attributes of one megawatt hour of green electricity (or whatever the size of the package you bought). This is true no matter where you live, and whether or not you are in the same grid or even in the same state as the green energy provider who sold it.

Verification is very important for RECs. Anyone can sell you a certificate and claim it represents clean, green energy. That’s why Community Green Energy brokers our RECs through Green-e® Energy, the number one oversight agency for RECs in America..they certify almost 70% of voluntary REC purchases. They verify that all of our RECs come from certified providers, and that the money you spend helps to actively promote green energy.

While acid rain was the concern when RECs were introduced, most people today are concerned with greenhouse gases. Today’s renewable portfolio standard legislation targets greenhouse gas emissions. But RECs still play the same role, promoting green energy, because green energy is pretty much emission-free. No SO2, creating acid rain. No greenhouse gases, producing global climate change. It’s important to realize that your REC promotes not just a greenhouse-gas-free world, but a cleaner world in every way.

As RECs have become more closely associated with the issue of global warming, people have begun to describe the “cleanliness” of RECs in terms of carbon equivalence. This is an estimate of the amount of greenhouse gas that wasn’t emitted when the electricity was produced. Carbon equivalence is used to represent all the greenhouse gases, because carbon dioxide is the most common, even though some of the other gases are more troublesome. The estimate is based on the average emissions for all the power plants in the area where the REC was generated. Community Green Energy gets our RECs from all over the United States, so we use a national average when estimating the carbon equivalence for our RECs, rather than the average for one particular area. It is important to remember that this is an estimate.

Looking ahead, as more people buy RECs, this will give our government the proof it needs that Americans are willing to accept higher prices for energy in return for cleaner air and a future free of climate fears. They will increase the stringency of RFP legislation. Eventually, they will add a “carbon tax,” or a penalty for the dirty emissions from the fossil fuel plant, which will even out the costs by bringing more users into the mix. Your REC purchase makes you a leader in America’s energy future; others will simply have to catch up with you. Of course, by that point, the cost differences between green energy and fossil fuels may have changed. Green energy will only become cheaper, as improvements in technology and economies of scale increase efficiency and bring down costs. And fossil fuel prices got very high in 2008. Every indication is that these kind of prices will happen again, and will probably get worse.

So, that’s the story, though the story isn’t over yet. To learn more about why people buy RECs, continue on to the next section.

You go away for a week, you miss all the fun.

The NYMEX started the month of May by doing the one thing no one expected: experiencing a prolonged surge of buying. In the space of four days front month pricing, which had been threatening to scrape the $3 barrier, suddenly shot up to $4.50. It has cooled off a bit since then, settling down in the $4.20-4.30 range, but has found at least temporary support at this level.

Take a quick look at the fundamentals, and you will see that there’s no reason on earth this should have happened. Storage levels are at near-record levels, and it is predicted that they will remain there for the rest of the year, with an all-time high sitting in storage when we hit Winter 2009. There’s plenty of LNG out there looking for buyers, much of which will go into storage just to have somewhere to put it. Rig count is roughly half what it was when natural gas prices were at their peak, but the shutdown in production still has not caught up with the drop in demand. Spring weather is running mild to warm.

We’re afraid fundamentals aren’t going to help you on this one. Something much more simple happened.

Investors decided it was time to get optimistic about the economy, so they did.

And natural gas was where they did it.

This is not the first jump we’ve seen this year; as you may recall, investors overreacted to a bit of good news in the storage report about a month ago. That bump lasted right up to the next storage report, whereupon it promptly dropped like a stone. But that rise was, at least, a reaction to fundamentals. This rise has nothing to do with natural gas supply, and everything to do with speculators growing tired of sitting on zero-interest T bills and looking to get back into the game.

There’s plenty of analysis, and no agreement, on who is doing the buying. Some suspect this is large funds looking to take long-term positions with an eye toward 2010. Some have attributed it to the actions of a single energy fund. Some are attributing it hangovers from bad short positions at the end of April. But everyone’s talking investor psychology, and nobody’s talking natural gas supply and demand. Apparently, when you’re buying commodities, the commodity itself doesn’t always matter.

What this means to you. First off, our apologies. We’ve been trying to help you understand the NYMEX, and how prices move, in terms of the market fundamentals which have traditionally driven natural gas prices. It is becoming increasingly clear that, looking forward, this will have to be balanced more and more with a completely different set of factors. Perhaps we should have spent a bit less time on storage levels and rig counts, and more time checking “Mad Money.”

Which leads to the next question: how rational is the exuberance this time? Is the economy really in recovery? From our standpoint, the signs are good, but the progress is fragile. Job count continues to fall, and until the number of employed Americans begins to rise, it is difficult to speak of a real recovery. Perhaps, instead of looking for the bottom on NYMEX prices, this is the bottom we should be tracking. We’ll keep you posted.

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