Short-Term Price Benchmark Trends
The ERC benchmark price for retail electricity continued to trend gradually upward last week, increasing by 0.80 percent to $0.0754 per kilowatt hour. Like the previous week, the biggest increase was in Illinois (4.61 percent), followed this week by Ohio (4.40 percent). This week’s price hike in Illinois reflects a 9.46 percent increase compared to one month ago. Prices in the other restructured states changed only marginally week-over-week.
Although retail electricity prices increased slightly last week, wholesale electricity and natural gas prices dropped substantially. Retail prices tend to follow gas prices, which should be reflected in next week’s benchmark prices. Mild weather forecasts, which are predicted through the middle of December, drove much of the market decline in gas. The December spot NYMEX gas contract declined by 9.15 percent to $0.216 per million British thermal units. Last week, the natural gas market also set new all-time lows for calendar strips 2016–2021.
Long-Term Price Benchmark Trends
Natural gas demand for heating remains considerably lower than at this time in the last five years. With storage already at 4.0-plus trillion cubic feet (Tcf), and a small injection forecast for this week, the market is having difficulty finding reasons to trade higher. The 4 Tcf storage level compares with about 3.6 Tcf one year ago, and around 3.8 Tcf within five-year average levels. Storage is already at an 11.2 percent surplus to last year and will increase significantly during the next few weeks as mild weather limits potential withdrawals. A milder forecast following the brief coldfront that is passing over most of the US is reinforcing the El Niño-driven prediction of a mild winter season.
While few factors are pressuring prices upward, some are worth mentioning. Gas prices are near production costs, increasing chances that more Appalachian drillers will shut down operations. The US rig count has dropped dramatically this year, driven by oversupply. Even though current demand is historically low, it is beginning to increase at a faster pace than production. Natural gas pipeline capacity limitations continue, particularly in the Northeast. Up to 11 percent of the US nuclear generation fleet is at risk of early retirement because of emissions and high operation costs. As we continue to adjust our production levels to counterbalance oversupply, it is worth remembering that curtailing production is easier than ramping it back up.
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.