As 2014 Electricity Prices Escalate Above 6 Cents, Calendar 2015-2018 Rates Are Still Available Below 5.5 Cents As Buyers Rush To Lock In Savings.
by Joe Quenet on 03/07/14
Electricity price spikes this winter should sound an alarm bell for
energy users in every region of the country that relies on natural
gas-fired generation as its marginal source of supply. The last few
months have seen record electricity prices in several regions
including Texas, where hourly prices briefly reached as high as
$5,000/MWh and 2014-2015 Commercial rates are now offered over 6
cents/kw for most medium-sized companies.
What lessons should be drawn from these events?
First, the good news: nationally, the natural gas market remains
adequately supplied. As all of us who have lived through winter
weather this year can attest, this winter has seen some of the
coldest days in the past twenty years. Further and of particular
importance for energy buyers despite the price spikes this winter,
the price strips for Calendar 2015 and beyond have barely budged
and are still priced at very attractive levels, enabling buyers to
mitigate longer term risks.
Second, the bad news: while prices have started to pull back, this
winter's Arctic blasts are likely to keep natural gas and
electricity prices substantially above year-ago levels for much of
the rest of this year and potentially even to the end of next winter.
This potential for elevated prices, however, will not end when winter
weather fades. During this year's injection (storage) season, from
mid-April through October, the market will be faced with a herculean
task, in order to replace the massive amounts of natural gas
withdrawn from storage this winter. This could result in continued
upward price pressure all spring and quite possibly into next summer
for both gas and electric rates.
Finally, the really scary news that every energy buyer should take to
heart: This winter's natural gas price spikes are only a small part
of the story. This winter has revealed a major risk factor developing
in electricity markets in several regions of the country- a lack
of adequate natural gas pipeline carrying capacity to serve total
demand for natural gas during periods of high demand, in a market in
which use of natural gas for space heating is continuing to grow,
coal and nuclear-plants are being retired and natural gas is
increasingly becoming the dominant fuel for electricity. It is this
huge infrastructure gap, not traders and speculators that have
caused natural gas prices at constrained hubs to set new all-time
records and caused severe price spikes in electricity prices in large
areas of the country. Further, absent immediate action to address
these infrastructure issues, this problem could become much worse as
additional coal-fired plants are retired and utilization of natural
gas continues to increase.
Conclusion: The magnitude of these risks should not be
underestimated, but do not yet appear to have been priced into
Calendar 2015- 2018 electricity futures in most regions. We urge
buyers to strongly consider covering a portion of their requirements
further out in time while a favorable buying opportunity still
exists.
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