Short-Term Price Benchmark* Trends
ERC’s average power price benchmarks declined steeply last week across all deregulated states. This marks the second week in a row prices have fallen. Connecticut and Rhode Island had the steepest declines, dropping by approximately 3.5 percent from the previous week.
Once again, a 24-month contract term continues to have the lowest price benchmark. The exception to this is Texas, where 12-month contracts posted the lowest benchmark price.
Natural gas futures contracts decreased modestly last week after another larger than expected net injection into inventory. Gas fundamentals remain bearish as temperature forecasts suggest weak demand in the mid-range. Despite a production slowdown, supply remains robust. According to the US Energy Information Administration (EIA), over the last nine weeks, 19 percent more gas was injected into storage than during the same nine weeks in 2014. Additionally, with 22 weeks left in the injection season, which normally runs through the end of October, the EIA currently expects an end-of-season inventory level to be above the five-year average end-of-season.
Longer-Term Electricity Price Drivers
Over the past week, natural gas prices have been trading near the bottom of their five-year range at a time when inventories are mostly around average. Most traders and analysts remain bearish, believing that the gas market oversupply will eventually push prices lower. It is still early, however, with plenty of potential for summer heat to rear its head, ramping up cooling demand and pushing prices higher. As I have mentioned before, July and August will determine which way the market swings — toward lower prices based on low demand or higher prices based on above normal temperatures.
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.