ERC: Electricity Price Trends for the Week Ending August 21
Short-Term Price Benchmark* Trends
This week’s average price benchmarks for commercial power are based on the prompt month of October 2015. The shift is based on the fact that a number of suppliers have already stopped pricing September contracts in their weekly matrix prices. This changes the trend curve from prices based on a September contract start date to prices based on an October start date.
The average power price benchmark for most states declined again last week, moving down by a half percent (.49 percent), to a national average of .0793 per kilowatt-hour. Prices declined most in Illinois (-2.78 percent), while prices actual rose slightly in Connecticut and Delaware. Overall, power prices are -1.59 percent lower than this time last month. Price benchmarks in Illinois have declined month-over-month by a substantial 10.32 percent.
The average price benchmark for longer term 48- and 60-month contracts are favorable in Pennsylvania, New York and Texas.
According to the latest NOAA six-to-ten-day and eight-to-14-day forecasts, a majority of the US is expecting above normal temperatures (except the West) through September 7. As such, above normal levels of cooling related to Nat Gas demand are projected into the first week of September.
Although demand is projected to increase over the next several weeks, supply is still robust and likely to offset any increase in demand due from cooling requirements. The current forecasts are not currently projecting any extreme conditions for the rest of the summer cooling season, suggesting that supply will more than offset the modestly above normal call on Nat Gas for cooling related demand.
Long-Term Price Benchmark Trends
Natural gas commodity prices at Henry Hub for calendars 2016–2021 are at an all-time low. Consider, however, that almost 30 percent of domestic natural gas production comes as a by-product from oil drilling. The price of oil is currently below $40 a barrel and the break-even price for producing shale oil is $55 a barrel. This means that unhedged oil production is at risk, and we have already seen a large number of drilling sites shut down.
Record production of natural gas from fracking in the Northeast and Midwest has so far compensated for lower gas production from oil drilling. Low gas prices and government regulations, however, are driving the conversion from coal to gas for power generation. Increasing reliance on gas for power generation is driving up the capacity costs associated with moving gas over the existing pipeline infrastructure in the New England and the Mid-Atlantic states. Power prices in the ISO New England are already some of the highest in the deregulated domestic market, with further increases likely due to capacity costs. Because of supply constraints, capacity costs in PJM territory will now increase payments to generators by 37 percent compared to the past 12 months. So as natural gas prices and moderate demand are pressuring power prices downward, capacity costs and infrastructure investment will increasingly add cost to power prices going forward.
Jim Moore, PhD, is president of the Energy Research Council. ERC manages a portfolio of primary research programs and databases that evaluate energy prices, procurement practices and management strategies.
Jim has been CEO of several research companies including TDC, a subsidiary of International Thomson; Highline Financial, a Thomson-Reuters company; and Mentis Corporation, which was acquired by Gartner Group. He has also served as executive director of The Global Futures Forum, an international think tank, and as managing director of Gartner Group’s Global Financial Services practice.
*The weekly average price benchmarks are derived from a standardized database of daily matrix prices issued by many electricity suppliers. The database is updated every business day and includes prices issued from September 2013 forward. The benchmarks are derived by aggregating individual supplier prices across the General Service tariff rate classes for each electric utility, and then averaging the utility price benchmarks together for a state level benchmark. Finally, these state level benchmarks are averaged across the five business days of each week to create the weekly average price benchmarks by state. These benchmarks reflect the average prices for General Service tariff rate classes by utility and state, based on next month’s start date. As mentioned, these benchmarks are based on matrix prices for commercial customers with an annual usage of up to 1 million kWh. While they are not a valid measure of pricing for larger C&I customers, the high level of correlation between matrix and custom pricing make the benchmarks a reliable measure of how prices are trending, as well as the direction and velocity at which prices are changing week-over-week and month-over-month. This is similar to how the S&P or Dow measures the rate and direction of change in stock market prices over time.
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