How Cheap Natural Gas Drives U.S. Electricity Prices
by Joe Quenet on 04/08/13
With new domestic discoveries came a dramatic increase in U.S.
natural gas production over the past few years, helped along by the fifth
warmest winter on record worldwide (2011-2012) that allowed unused supplies to
be build up and stored as carry-over. But it’s not just the low price that
makes natural gas so important for electric power generation, it’s also the
flexibility it can provide the generator. Today, although coal still accounts
for about 38 percent of all power produced in the U.S.,
natural gas plays an even bigger role in determining the price of electricity.
A power plant can throw a switch and start burning gas for power almost
immediately. That's something you can't do with coal.
So how exactly does gas set the power price? In most regions of the
US, the price paid for electricity from the last power plant fired up (to meet
the last unit of demand within a given hour) sets the wholesale price paid to
all previously dispatched units within that region. And since gas-fired power
plants are usually the quickest to start (and most expensive to run) when
compared to nuclear, hydro, wind and coal they tend to be fired up last,
thereby setting the hourly price.
Today, because of this new reliance on gas-fired generation, US average
wholesale peak power prices range from $27 to $34/MWh, driven down by gas
prices that currently range from $3.50/MMBtu to $3.80/MMBtu and look to remain
below $6.00 through at least 2020 given current NYMEX futures settlements. In
comparison, this same time five years ago the wholesale electricity price range
was between $52-$55/MWh, while natural gas prices ranged between $7.00-$8.00
MMBtu, (peaking at an all-time high of $13.57 in July 2008).
In stark contrast, while
cheaper domestic natural gas has led to lower wholesale and retail power prices
for Americans, those same benefits derived from cheaper gas are not available
in most European countries.
Similar to U.S.
reliance on natural gas generation, the much higher price of power in Europe
is directly related to the much higher price of natural gas available there. As
of mid November (when U.S.
gas averaged about $3.70) the average price of European gas was $10.33/MMBtu in
Germany,
$10.40/MMBtu in France
and $10.50/MMBtu in Italy. If
we convert wholesale power prices being paid in Europe today (at 1.00 Euro to
$1.28 US dollar) we find the wholesale price of power in Germany last week was
$62/MWh, and $63.55/MWh in France, both about 200% higher than current US
prices.
An even greater difference can be found when comparing retail electricity
prices between the U.S.
and Europe from last May, a time when US
gas prices were trading below $2.70. While the average American paid 11.9
cents, prices were 18 cts/kWh in France, 25 cts/kWh in Italy, 26cts/kWh in
Sweden, and 32cts/kWh in Germany and 37cents/kWh in Denmark, a premium of
150-300% over what we pay.
