Short-Term Price Benchmark Trends
Last week marks the second week that retail electricity price benchmarks* have increased, from an average low of .0819 week-ending May 1, 2015, to .0830 week-ending May 15, 2015. Although New Jersey, New York, Ohio and Connecticut had slight declines in their average price benchmarks, other deregulated states, lead by Illinois with a 3.14 percent increase, raised their benchmark prices.
Consistent with recent increases in electricity prices, the Energy Information Administration (EIA) reported that natural gas cooling demand rose 5.1 percent from the previous week, with consumption increasing 13.8 percent week-over-week, as warmer than average weather took hold in much of the eastern half of the country. Over the next 15 days, the National Weather Service forecasts much cooler, below normal temperatures, for much of the country. The cooler weather is expected to help curb natural gas demand and allow for large storage injections over the coming weeks.
Once again, prices for 24-month contracts were most favorable last week, except in Pennsylvania, where 36-month contracts prevailed, and in Texas, where 12-month contracts showed the lowest average prices.
Longer-Term Electricity Price Drivers
Natural gas storage remains the key NYMEX driver going into the summer. The primary summer risk is July and August heat. If cooler than normal temperatures prevail, we are likely to see ongoing injections, a continuing shrinkage of the storage deficit and a potential break in near-term prices. If it is hot, then the deficit will widen and high prices will be needed to discourage demand. This is the weather bet for those who have fixed-rate contracts. If storage injections slow, then winter prices will need to rise in order to incent additional injections OR winter prices will rise because of the risk of low supply. So, winter prices may have more upside potential than summer prices when it comes to the weather wildcard.
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.