Short-Term Price Benchmark Trends
Moving to a December prompt month, ERC’s average benchmark price for retail electricity rose slightly last week by a third of a percent. Although the increase was slight, it reverses a four-week downward trend in prices nationally. Rhode Island (+1.42 percent) and Maine (+1.01 percent) experienced the largest increase in electricity prices last week, while Texas (-2.03 percent) and Illinois (-0.97 percent) saw prices continue to drop.
Prices last week for longer term 36/48 month contracts remained favorable compared to shorter term 12/24 month contracts in the District of Columbia, Maryland and Texas. In the other states, pricing for short-term contracts was lower than longer-term electricity contracts.
The Nymex spot contract for natural gas continued to fall last week, moving into a new lower trading range that has not been seen since April 2012. The main driver for the new round of selling is the latest weekend NOAA temperature forecasts, which are now projecting above normal temperatures across most of the US going into the second week of November. The new warming trend will mitigate heating demand for the next several weeks and likely result in a robust, above normal injection of natural gas into storage. This, in turn, is likely to keep retail electricity prices from trending upward, at least through the next several weeks.
Long-Term Price Benchmark Trends
One of the long-term factors that could help rebalance the supply and demand of natural gas is exportation of liquid natural gas (LNG) from the United States. Currently we only export through pipelines to Canada and Mexico. Connecting our domestic gas supply to the world market requires converting natural gas to LNG that can be transported by tankers overseas.
In January, Cheniere Energy will begin shipping LNG at its Sabine Pass LNG terminal in Louisiana. As additional LNG production and delivery facilities come online over the next several years, LNG exports are expected to increase demand and therefore the price of natural gas. By 2020, LNG exports are expected to total around 9.5 Bcf/d, or approximately 13 percent of the gas currently produced in the United States.
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.