Short-Term Price Benchmark* Trends
After two weeks of treading water, the average price benchmark for power dropped last week by 0.60 percent. Declining prices were lead by Connecticut, Texas, New York and Ohio. Exceptions to the generally downward shift in prices last week were Illinois (+4.54 percent), and to a lesser extent Maryland (+1.69 percent). The Illinois price hikes are in large part being driven by capacity issues that have plagued that market for the past several months.
Contract terms of 36 months continue to enjoy most favorable pricing compared to shorter 12- and 24-month terms in the District of Columbia, Maryland, New York, Ohio and Pennsylvania.
Although we have seen warmer weather over the last few weeks, forecasts for cooler weather over much of the eastern half of the country for the beginning of July may lessen demand and allow natural gas storage levels to increase. A weak to moderate El Nino, on the other hand, will likely cause above-average temperatures in the West, Great Lakes and Southeast. This would tend to create greater demand for gas-fired generation.
Long-Term Electricity Price Drivers
There are a number of factors effecting power prices moving forward. California produces almost a third of its power through hydro-generation. The state’s prolonged draught conditions will almost certainly increase the use of gas-fired generation and the cost of power in that region of the country.
There is still a possibility we will see above average temperatures toward the end of July and into August. If so, this would increase demand, decrease gas storage, and likely lead to increases in power prices. Natural gas storage levels are at record highs so far this year. Injections have averaged 85 Bcf per week since April, which is 16 percent above last year’s record pace.
Last week, the EPA released a five-year study that found hydraulic fracturing (fracking) for oil and gas has no “widespread, systemic impacts” on drinking water. While it did find contamination in a limited number of cases due to irresponsible drilling practices, the report generally supports responsible fracking practices.
There are currently no operational exports, but four liquid natural gas projects are under way right now. Others are expected to come online in the 2016–2018 timeframe. These projects will significantly strengthen our ability to export natural gas to a world market in which natural gas prices are considerably higher than in the United States. Connecting us to the world market will cause domestic prices to align with the much higher world price for natural gas.
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.