ERC: Price Benchmark Trends Week Ending April 1, 2016

Short-Term Price Benchmark Trends

The ERC national average benchmark price for retail electricity decreased slightly last week to $0.0719 per kilowatt hour. Prices decreased marginally in each deregulated market, except Texas (2.0% increase) and Washington, DC (0.3% increase). Although retail electricity prices in Texas remain the lowest in the U.S., the average benchmark price in Texas is now 8.2% higher than four weeks ago.

The latest National Oceanic and Atmospheric Administration six-to-ten day and eight-to-fourteen day forecasts are calling for a round of below-normal temperatures across the eastern 30% of the U.S. The latest six-to-ten day forecast is projecting above-normal temperatures over the western region of the U.S., with below-normal temperatures anticipated for the eastern third of the country. The eight-to-fourteen day forecast is similar, but the area of below-normal temperatures seems to be less severe than in the short-range forecast. Cooling trends in the spring will not result in winter-like surges in natural gas heating demand. In addition, as we enter the shoulder season, cooling trends will eliminate any early surges in natural gas cooling demand. 

Long-Term Price Benchmark Trends

Last week, the natural gas market recorded its third weekly gain out of the last four weeks. This upward trend is primarily because of a technical short covering rally and a short-term forecast of cooler-than-normal temperatures. The fundamental structure of the market remains the same, however, with prices fluctuating within a relatively narrow range. After establishing multi-year lows one month ago, market prices have discounted the record level of natural gas storage. 

Natural gas production finally appears to be slowing slightly in response to market prices and the dramatic rig count plunge during the past couple of years. The prolific Marcellus region that accounts for more than 20% of total U.S. output continues to show immunity to low prices. Until this particular region exhibits some decline in output, production will continue to outstrip demand, and add to our bulging storage surplus. 

On the import/export front, the Canadian market is also oversupplied, and is ready to offset any unexpected cuts in U.S. production with a spike in Canadian imports. While export activity into Mexico could remain brisk, it does not appear capable of affecting the U.S. supply/demand imbalance. 

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.