Short-Term Price Benchmark Trends
The ERC national price benchmark for retail electricity in deregulated states rose last week by 1.66% to $0.0721 per kilowatt hour. Every state posted a price increase, with the greatest gains in Texas (3.88%), Maine (2.14%), and Rhode Island (2.06%). Last week’s price hike brings the national price benchmark back to within one percent of prices one month ago.
Last week’s upturn in retail electricity prices is because of a short covering rally based on slightly colder weather conditions than previously forecast. This introduced a degree of short-term uncertainty into the market. The three-day rally last week ended on Friday with natural gas prices dipping 2.9 cents to close the week at $1.907 per million British thermal units.
The current National Oceanic and Atmospheric Administration short-to-midrange outlook calls for above-normal temperatures on both coasts, and colder conditions in the middle of the U.S. Weather is becoming less of a factor as we have exited the winter season. With spring here, any below-normal temperatures will likely only mitigate demand days for cooling.
Long-Term Price Benchmark Trends
Natural gas storage continues to expand compared with last year and the five-year average. Storage declined a scant one billion cubic feet (Bcf) in the week ending March 11th, compared to storage inventories that normally drop 80 Bcf this time of year. Production continues to be strong despite record low rig counts. Natural gas prices have escalated more than 15% since hitting a 17-year low in early March, but are still 30% below where they were last year at this time.
The only demand side conditions that could offset our record storage levels would be sustained cooling demand during a red-hot summer season, or a steep drop in production because of widespread bankruptcy in the producer community. It is true that market prices continue to shift utilities away from coal and toward less expensive alternatives, such as natural gas. So far, however, it is not enough to change the supply-demand imbalance. We have begun exporting liquefied natural gas, but this too will take time to reach export levels that can affect inflated gas storage levels. Overall, I expect gas and retail electricity prices to continue short-term fluctuations within a narrow trading range.
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.