Power Prices Spike on Brief May Heat Wave: What to Know About Energy Markets This Week
What You Need to Know About Energy Prices This Week
As mid-May temperatures hovered around 90o F from Indianapolis to Boston earlier this month, power prices followed suit, spiking as high as $733/MWh in NYISO’s West Zone A (Buffalo). ISO-NE’s NEMASS Boston hub saw prices approach $300/MWh, while PJM’s PECO Energy zone and MISO’s Indiana hub reached $183/MWh and $305/MWh, respectively.
Despite high pricing in advance of the summer season, the major grid operators have released summer capacity figures, which in general reveal adequate supply availability. For example, MISO expects to have a near 19% reserve margin (MWs available above the expected system peak), while PJM expects to have a reserve margin that hovers around 30%.
However, the high real-time power prices, which are unusual during a shoulder month like May, underscore how abnormal conditions (such as a sudden onset heat wave) can still create volatility in the energy markets. Customers engaging in block and index or fixed price procurement strategies can insulate themselves from these types of price spikes.
A Brief Primer on Energy Markets
Every week, EnerNOC’s energy intelligence team analyzes the market developments driving energy prices. In this weekly article, you’ll see a lot of discussion about energy generation sources, such as natural gas, coal, nuclear, and some renewable and distributed energy resources. You’ll also see a lot of talk about the factors affecting generation: weather, production, storage levels, natural disasters, geopolitical events, and so on.
The connections between the drivers and the energy markets are complex, but here’s what you should know in a nutshell. Weather is a key driver because it has a direct impact on demand for electricity and natural gas. Temperature extremes cause spikes in demand for natural gas, either directly for home heat or indirectly as a fuel source to generate electricity for air conditioning. Similarly, unexpected natural disasters or geopolitical events could suddenly affect supply, which has a similar downstream effect on pricing. And, of course, any change in pricing is going to affect your organization’s energy costs. Keeping up with new developments in the market is important to ensuring you don’t miss opportunities that could save significant money for your business over the long term.
If this is all still a little confusing, talk to an energy procurement expert to learn why the factors affecting energy markets actually matter to your business. Or check out our other content to learn more about what drives energy prices and how you can turn temporary low-price opportunities into long-term savings.
What's Driving the Market Up?
In the short term:
- Total supply of natural gas fell 1%, including a 9% reduction in imports from Canada
- Dry natural gas production remained flat for the week
In the long term:
- US Department of Energy gives approval to the Golden Pass LNG liquefaction terminal for exporting 2.21 Bcf/day of LNG for the next 20 years
- US Energy Information Administration (EIA) projects 4% year-over-year growth in gas used to generate power
- The EIA projects that 2017 natural gas prices could average $4/MMBtu
- Cheniere Energy, the operator of the Sabine Pass terminal, received authorization from FERC to commence liquefaction and export activities from Train 3
- According to the EIA, US is on its way to being a net energy exporter
- Liquefied natural gas exports have begun and are expected to average 1.8 Bcf/d, up from about 0.6 Bcf/d in 2016
- PJM’s board of directors has approved higher tariff rates through 2024 to help cover operating and administrative costs
- 21 GW of generating capacity expected to retire by 2020
What's Driving the Market Down?
In the short term:
- Weather forecasts for next 30 days show potential for below-average temperatures in West PJM and MISO
- US natural gas demand is down 1% for the week
- Working natural gas in storage remains closer to the five-year maximum
In the long term:
- The White House has directed the DOI to allow oil and gas drilling in federally owned offshore areas
- Rover Pipeline & Atlantic Sunrise Project win FERC approval
- Nuclear industry targets 30% cost reduction by 2018 in order to increase competitiveness in the market
- FERC has approved the construction of capacity enhancement for the Rockies Express Pipeline
- Pipeline flows from the Algonquin Gas Transmission’s Incremental Market project started on November 1
- The US electric grid is expected to add almost 55 GW of generating capacity, most of which will be wind, solar, and natural gas
- 28,607 MW of natural gas capacity is expected to come online between 2015 and 2017
- Strong growth from shale gas is expected to continue
How Are Natural Gas Prices Trending?
This chart shows how month-ahead prices for natural gas are settling on the New York Mercantile Exchange. It is a good indicator of where the market is, relative to where it has been over the past four years.
What Do Forward Natural Gas Markets Look Like?
Henry Hub represents a main distribution center for natural gas. Activity at the Henry Hub is considered a benchmark for natural gas prices in markets across the country, including the NYMEX and OTC Global Holdings. This chart shows how Henry Hub forward prices for natural gas have trended over the past calendar year.
1 Year Trend of Power Around-the-Clock Calendar Year Prices
Prices for power are constantly fluctuating, and it can be difficult to know exactly when they are going to spike or plummet. These charts show how future power prices have trended over the past calendar year for New England (ISO-NE), the mid-Atlantic region (PJM), New York City (NYISO Zone J), and Northern Illinois.
1 Year Trend of Natural Gas Calendar Year Prices
While the Henry Hub provides the benchmark, prices tend to vary based on regional factors. These charts show how forward prices are trending over the previous calendar year at the hubs for New England (Algonquin), New York (both Transco Z6 NonNY and Transco Z6 NY) and Chicago (Chicago City Gate).
Extreme swings in weather can significantly impact energy prices. These maps depict forecasts courtesy of the National Oceanic and Atmospheric Administration. Blue shading indicates areas with a high probability of seeing below-average temperatures, and red shading shows areas that are likely to see above-average (white areas are most likely to see average temperatures for their climate). The darker the shade of either color, the higher the probability that the corresponding area will see abnormal weather.
For questions about this week's article, contact EnerNOC Energy Analyst Ricky Ghoshroy.