Short-Term Price Benchmark* Trends
ERC’s Average Power Price Benchmarks dropped in all deregulated states last week. This marks the end of a four-week trend of increasing power prices for commercial customers. Ohio and Texas had the steepest declines, dropping by over 3 percent from the previous week.
A 24-month contract term continues to have the lowest price benchmark in every state except Massachusetts, where a 12-month contract is slightly lower.
Wholesale power prices traded sharply lower across all major trading points for the week. In PJM, the 12-month strip was down between $2 and $3; the 24-month strip was $1.75 to $2 lower and calendar 2016 pricing was off $0.30 to $0.90. Northeast strips followed a similar pattern, as did New York and New England pricing.
Natural gas prices also fell as strong injections into storage and lower demand combined to create downward pricing pressure. With overall demand for natural gas weaker due to the shoulder season, revised mid-range weather outlooks now predict normal temperatures for most of the country, with the exception of warmer temperatures west of the Rockies. This should keep demand in check and lay ground for continued strong storage building in the coming weeks.
Longer-Term Electricity Price Drivers
Looking forward, current market conditions are expected to maintain downward pressure on power prices through June. With moderate demand anticipated based on moderate weather forecasts, natural gas storage levels are expected to show surplus to the five-year average. The Algonauin Incremental Market project is bringing expanded pipeline (and capacity) to the Northeast, while natural gas production remains robust due to increased drilling efficiency and improved equipment.
Factors that could drive prices up include the possibility of warmer than normal temperatures toward the end of June and the start of the 2015 Atlantic hurricane season. In addition, as US Environmental Protection Agency rules go into effect to limit power plant emissions, many generators will switch from coal burning to natural gas burning. This is an important factor that puts upward pressure on electricity and natural gas prices. Approximately 46 GW of coal capacity is set to retire between 2012 and 2020, where 33 percent of retirements will take place in 2015.
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.