Short-Term Price Benchmark* Trends
ERC’s average power price benchmark declined for the third week in a row, moving down by a .69 percent, to a national average of $0.0787 per kilowatt-hour. The steepest drop was in Texas (-2.03 percent), Connecticut (-1.72 percent), and Maine (-1.70 percent). Overall, power prices are now 2.19 percent lower than they were a month ago. Only Illinois saw power prices rise sharply by 1.72 percent.
The average price benchmark for longer term 48- and 60-month contracts were favorable last week in Illinois, Maryland and Texas.
NOAA’s short-term weather forecast continues to call for increased cooling demand with a major portion of the country expecting above normal temperatures. The longer-term 8 to 14 day forecast is slightly is more moderate, with above normal temperatures projected to cover only about half of the country.
The total working gas supply is now 18.3 percent higher than last year at this time, and 2.9 percent higher than the five-year average. Production continues to grow year over year, but at a rate of 7.3 percent for September, down from 9.7 percent in August. September growth is expected to be the slowest rate of growth since January 2013.
Long-Term Price Benchmark Trends
There are a number of factors that should shape power prices this winter. NOAA predicts El Niño has a 90-plus percent chance of lasting through the upcoming winter and an 80 percent chance of lasting into early spring 2016. The development of a strong El Niño is likely to drive warmer weather patterns this winter.
Despite natural gas storage injections dropping this summer, high production has kept the market on pace to end the season above the five-year average. This is pushing gas prices down and impacting drilling activities. Overall, we have seen a 58 percent year-over-year decline in oil rig counts, but continued growth in Northeast production is keeping production higher than a year ago.
Lower gas prices year-over-year, especially in the PJM and Southeast regions, are boosting demand for gas-fired generation as more generation plants switch from coal to gas. Greater dependence on gas, however, raises concern about capacity and power reliability. As such, the PJM grid has phased in a capacity improvement plan to strengthen reliability of the region’s power supply. The new market structure, known as Capacity Performance, will become effective beginning June 1, 2016. This new market structure is going to increase power prices in the PJM region.
All in all, most observers are leaning toward a mild winter, moderate demand, strong gas production and relatively low prices (for the winter months). On the other hand, capacity issues in the New England and Mid Atlantic regions may cause power prices to rise, particularly if we have a colder than normal winter.
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.