By Peter Gardett, Managing Editor, AOL Energy

electricity gridNatural gas prices are stifling power sector diversification and limiting earnings growth in the sector, bank analysts said amidst mixed first-quarter results forecasts for investor-owned utilities.

Earnings calls discussions for these companies have been dominated by natural gas prices, which remain the biggest single opportunity, and the biggest single problem, for electric power generators in the United States.

The U.S. lost five or six years of power demand growth during the recession, Barclays commodities and power research analyst Mike Zenker told AOL Energy. Power demand has since recovered slightly, but a combination of cheap fuel price outlooks for natural gas and regional oversupply of renewable generation are keeping prices for electricity low.

Low natural gas prices are weighing on power prices at utilities that build their price outlooks onto fuel costs, limiting investor enthusiasm for a sector already struggling to recover from the impact of the sharp recession that began in 2008.

Natural gas prices were trading at CME Group just above $4.25/'000 ft3 late on Tuesday April 19, less than half the price wellhead natural gas prices garnered in the same month in 2008, according to Energy Information Administration data.

With natural gas supply forecasts soaring in line with expanded drilling as hydraulic fracturing drilling techniques (better known as "fracking") access massive and previously-untapped reserves, utilities hoping to diversify their fleets of power plants face challenges building any units not fueled by natural gas.

In many cases, the heightened availability of natural gas generation due to low fuel prices is keeping older coal-fired power plants offline, Barclays' Zenker said. That will limit the impact of potential 2015 shutdowns for older facilities with higher emissions profiles impacted by Environmental Protection Administration rules, Zenker said, as many of those units will have already been replaced by natural gas units that are more affordable than retrofits on older coal generation.

Utilities reporting their first-quarter results in the coming couple of weeks will be focused on the upcoming summer peak generating season, but analysts say most expect sufficient capacity and limited demand-created premiums for summer electricity prices.

The National Oceanographic and Atmospheric Administration (NOAA) will release its latest forecast for the coming three months on April 21, 2011. The agency's forecasts are closely watched in the electricity industry, especially as summer approaches, and any adjustments to the official forecast could roil markets in traded electricity. In its last outlook for the months of April, May and June NOAA highlighted the ongoing La Nina effect, which keeps temperatures in most regions below average, excepting the interior Southwestern U.S. and parts of Alaska.

Regardless of weather patterns, expectations for power price increases have been put off to 2015 and beyond by bank analysts. A combination of steady demand recovery, transition of drilling infrastructure from natural gas to recovery of higher-priced oil and retirements of coal-fired plants in 2015 could contribute to a tightening U.S. power market by the middle of the decade.

"There is nothing on the demand side that will boost natural gas prices before 2015," Barclays' Zenker said, keeping electricity prices low.

AOL Energy, which launches this spring, serves the electricity sector as it innovates, reinvests and repowers with renewable generation and fuels. Follow AOL Energy on Twitter @Aolenergy and Peter Gardett on @petergardett

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