Short-Term Price Benchmark* Trends
For the fourth week in a row, ERC’s benchmark price for retail electricity fell -0.44 percent to a national average for deregulated states of $0.0692 per kilowatt hour. The biggest drop last week was in Ohio (-1.14 percent). Overall, ERC’s average price benchmark is currently -3.11 percent lower than a month ago, with Maine (-6.23 percent) and New York (-5.08 percent) posted the greatest month-over-month decline.
Continuing a four-week trend, ERC’s power price benchmarks for longer-term contracts are more favorable than short-term (12/24 month) contracts in Washington DC, Maryland, New Jersey, Pennsylvania and Texas.
November’s natural gas futures contract increased by 2.08 percent last week after an injection into inventory that was slightly below the market consensus. The market ended the week in a new higher technical trading range in response to NOAA’s most recent short-term forecast for below normal temperatures moving into the Eastern region toward the end of this week. This is likely to limit storage injections to a normal range ahead of the usual peak supply level that tends to develop at around the first week of November. The longer-term 8- to 14-day forecast, however, is still projecting above normal temperatures across the country through the 25th of October. An exceptionally high storage level, capable of responding to a harsh winter, will likely continue to limit any short-term movement upward in natural gas and, subsequently, electricity prices.
Long-Term Price Benchmark Trends
Even though electricity is generated from a variety of sources — hydroelectric, wind, solar, nuclear, gas — the way system operators pay generating plants, and the amount you pay per kWh, is primarily determined by the regional price of natural gas. So predicting electricity prices is really all about predicting natural gas prices, which is why we talk so much about natural gas.
Natural gas prices are driven by a number of factors that analysts track to forecast electricity trends:
Weather: Above or below normal temperatures (depending on the season) increase demand for cooling or heating. High demand increases electricity consumption and depletes gas storage. This winter, a strong El Niño is expected to deliver moderate temperatures and demand that can easily be handled by current storage levels.
Natural Gas Production: Fracking has made the US a net producer of natural gas. Even though there are now about 62 percent fewer drilling rigs compared to a peak of 1,609 last October, natural gas production is at an all-time high.
Natural Gas Storage: Ample storage allows for the uninterrupted supply of natural gas to electricity generating plants at relatively low prices during the peak withdrawal season (typically November through March). Working gas inventories of 3,633 Bcf are currently 14 percent higher than last year at this time and 4 percent higher than the five-year (2010–2014) average.
Natural Gas Exports: Because liquid natural gas (LNG) production facilities and LNG shipping required to export our natural gas surplus does not currently exist, the US enjoys natural gas prices that are 3-4 times lower than the world market. This differential should continue for another three years — the time it will take to develop the infrastructure necessary for the US to export natural gas beyond Mexico. At that point, US prices will escalate to the world price of natural gas.
Pipeline Capacity: Natural gas prices are comprised of two components: (1) natural gas supply, and (2) natural gas basis (or capacity costs associated with transporting gas over existing pipelines). In areas like the Northeast and Midwest, demand frequently exceeds pipeline capacity to deliver natural gas to generating plants, thus driving up the price of gas and electricity in those regions. PJM’s new capacity performance model and capacity related issues in New England will continue to keep electricity prices higher than in less capacity-challenged regions like Texas.
Legislation and Regulation: EPA’s Clean Power Plan, the DC Court of Appeals decision to vacate EPA’s 100-hour limit on emergency diesel generators and FERC’s 745 appeal to the US Supreme court are all examples of how pending legislation and regulations may impact electricity prices moving forward.
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.