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ERC: Electricity Price Trends for the Week Ending June 19

June 24, 2015 By Jim Moore, PhD

Jim Moore, PhD

Short-Term Price Benchmark* Trends

The average price benchmark for power remained relatively unchanged last week in most states. This marks the second consecutive week in which power prices have trended flat. Both New Jersey (2.93 percent) and Texas (2.06 percent) posted notable increases, but most of the other states experienced very slight variation from prices the previous week.

Like the previous week, 36-month contract terms were priced below 12- and 24-month contracts last week in Illinois, the District of Columbia, Maryland, New York, Ohio and Pennsylvania.

Below-average temperatures are expected across much of the country during the next few weeks. Both the six-to-10 day and eight-to-14 day forecasts show above-normal temperatures for both coasts through early July, with the middle of the country projected to experience cooler-than-normal temperatures throughout the forecast period. This forecast should result in below-normal demand and result in additional storage injections for natural gas.

According to the US Energy Information Administration (EIA), natural gas production is quite robust with a year-over-year increase of 5.1 percent over last year for the week of June 17. The current natural gas inventory level is well above last year at this time, with the deficit versus the five-year average narrowing this week. Compared to last year, total inventories are showing a surplus of 730 billion cubic feet (Bcf), 42.9 percent above last year, and a surplus of 1.9 percent compared to the normal five-year average.

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Long-Term Electricity Price Drivers

The reason natural gas prices are such a good indicator of power prices is that independent system operators (ISOs) set the price of power based on the cost of resources used to generate energy. The least expensive resources are renewables like wind, hydroelectric and solar. Next is nuclear energy and then coal-generated power. In most cases, however, the energy generated from these resources does not meet demand. ISOs in the most populous regions of the country — New England, New York, Texas and California — must rely on natural gas to meet daily energy demand.

Logically, you may expect an ISO to pay for each resource based on its cost, with the price consumers pay for power based on the average cost to procure electricity from all the different resources, but the industry doesn’t work this way. Instead, generation plants get paid the same price per kilowatt for the power they produce based on the cost of the resource that provides the final kilowatt needed to meet all user demand. This is true regardless of all other resources used to meet demand. In most cases, the last (and most expensive) resource used to meet demand is natural gas. This means that the cost of all resources (renewables, nuclear and coal) default to the cost of natural gas.

Natural gas prices are driven by weather, demand, production and storage inventories. Lower levels of demand allow natural gas storage injections. If production remains strong, natural gas prices will likely decline. These are the conditions that currently prevail in the marketplace. Today natural gas prices are at historic lows, and power prices have followed accordingly. Keep your eye on natural gas as a lead indicator of where power prices are likely to go.

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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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