Short-Term Price Benchmark Trends
The national average benchmark price for retail electricity last week dropped to $.0725 per kilowatt hour. Texas prices dropped a substantial -3.3 percent. New York and Illinois experienced decreases of -1.4% and -1.3%, respectively. Although relatively minor, prices slightly increased in Ohio (0.4%), Pennsylvania (0.2%), and New Jersey (0.4%).
Despite pockets of occasional cold, the National Oceanic and Atmospheric Administration’s short-to-medium term outlook projects mild temperatures into March. Occasional outbreaks of cooler temperatures are short lived, with little impact on natural gas withdrawals to meet heating demand.
Long-Term Price Benchmark Trends
Total U.S. natural gas supply has been at or near record-breaking levels for several weeks. Although oilfield service company Baker Hughes shows a significant declining drilling rig count, production remains surprisingly strong. With temperatures projected to be above average for the remainder of the winter season, little on the horizon indicates natural gas prices will move significantly upward.
Several factors, however, suggest prices won’t decline much lower than they are now. First, power sector demand for natural gas-fired generation is increasing, particularly in off-peak demand periods. This is likely because equipment that is more efficient can run 24 hours a day to take advantage of off-peak electricity prices.
Second, we continue to develop our ability to export domestic liquefied natural gas. As export capacity builds, the domestic price for gas is likely to move upward toward international market prices. Third, if the summer season produces an excessive amount of above-normal temperatures, withdrawals on supply could be stronger than in the past. All this suggests that while gas and electricity prices may stay low for the near future, the likelihood they will increase is greater than the likelihood they will decline much further.
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.