Short-Term Price Benchmark Trends
Based on a prompt month (contract start date) of March 2016, the ERC average benchmark price for retail electricity dropped by -1.07% last week to $0.0749 per kilowatt hour. The biggest declines were in Maine, where prices fell by -2.82%, and Rhode Island, where prices dropped by -2.54%.
So far in 2016, retail electricity prices have fallen steadily for the first two weeks of the New Year. The East Coast is currently dealing with cold temperatures, and a blast of snow is expected for this coming weekend, potentially bringing a foot or more of snowfall. Despite current weather conditions, warmer temperatures are forecast to move into the East Coast starting next week, and it looks like the market is factoring milder conditions into its pricing, as the NYMEX has largely shrugged off concerns over sustained cold weather.
Long-Term Price Benchmark Trends
Natural gas stockpiles are projected to end the withdrawal season with an excessive amount of supply surplus. Even with cold temperatures, the current inventory level is 20.3% above last year at this time, and almost 16% above the five-year average. Weather remains the primary driver of natural gas prices. Natural gas is the principal driver of retail electricity prices. Longer-term weather outlooks from the National Oceanic and Atmospheric Administration forecast above-normal temperatures over the entire US into early February. With winter now in its advanced stage, and mild temperatures forecast for the foreseeable future, production trends and the supply surplus will increasingly be the focus of attention. Unlike crude oil, gas production is having some difficulty increasing back to last year’s level. Friday’s Baker Hughes rig count posted an unusually large drop in the gas rig count of 13, or almost percent.
Whether this eventually creates a gap between supply and demand remains to be seen, but it is well worth watching.
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.