Energy Markets have moved….What’s coming?

Markets have moved….What’s coming?

In this month’s issue we will focus on where markets are moving and why. Economic and Investment decisions, where energy spend is material to an enterprise’s budget, becomes a process beginning with good information both in the market world and at the enterprise level with the accuracy of qualitative data usage and costing.

Electric power, depending on the source and portfolio of the generation, can be affected by weather, supply constraints, regulatory impacts, politics and in many cases geopolitics. Natural Gas is similar in many ways, and both may find themselves held hostage to infrastructure constraints which can strand supply, making certain end-user locations the beneficiaries of lower than index market costs while other locations are unable to procure short and long-term supply and as a result, the victim of much higher market prices. The good news is that in general natural gas prices have come down significantly in the last few weeks. Storage is above the 5-year average and last year comparative timeframes by significant margins. At least in the short-term natural gas looks to be on the lower end of the price curve. Power is far more sensitive to coal fired plant reductions, the need for higher cost peaking resources, and a general demand outpacing replacement resources which complicate long-term power pricing.

We have seen the impact in the last several months where the Sumas (Washington State-British Columbia) supply point feeding the Northwest pipeline from Canada has seen very high natural gas prices, sometimes 10-20 times market index and more, because of infrastructure issues creating supply limitations. That was bad enough, but with Pacific Northwest coal plants shutting down this has exacerbated pricing on the Mid C, which historically has been some of the lowest price if not THE lowest price power in the US, skyrocket to term pricing well above $100/MWh.

What is the Short-Term Energy Outlook Forecast beginning in Spring 2023?

From the US Energy Information Agency (EIA) the expectation is that new renewables capacity — mostly wind and solar — will reduce electricity generation from both coal-fired and natural gas-fired power plants in 2023 and 2024. Renewable generation capacity additions are less uncertain than other forecasts because the survey is based on monthly information. However, electricity actually generated from both renewable and nonrenewable sources varies based on weather conditions and market dynamics. It’s this aspect that complicates the generation forecast and where most of the uncertainty lies.

Wind and solar accounted for 14% of U.S. electricity generation in 2022. In February, the forecast indicated that wind and solar will rise slightly, accounting for 16% of total generation in 2023 and 18% in 2024. Electricity generation from coal falls from 20% in 2022 and to 17% in both 2023 and 2024. Natural gas accounted for 39% of electric power sector electricity generation last year, and forecasts indicate its share to be similar in 2023 then fall to 37% in 2024.

Electricity generation from renewable energy sources has been growing steadily in the United States over the past decade. Last year, electric power generation from all types of renewables accounted for nearly one-quarter of total generation by the U.S. electric power sector.

Sources of Uncertainty - Weather and Fuel Costs

As previously mentioned, the two leading factors that make electricity pricing forecasts especially uncertain are future weather and fuel costs. EIA forecasting uses temperature outlooks from the National Oceanic and Atmospheric Administration. Therefore, it comes as no surprise that temperatures directly affect overall electricity demand.

Electricity demand typically peaks in the summer when homes and businesses use air conditioning. Over the last 10 years, July 2020 saw the most monthly population-weighted U.S. cooling degree days; the most heating degree days were in January 2014, at 971 heating degree days. Electricity demand increases less during winter months because about 40% of U.S. households use electricity for their primary space heating needs.

The EIA scatter graph above suggests the trend is generally more heating degree and flat cooling degree days.

One of the challenges of predicting energy prices and the impact commodity price fluctuations have on end-use customers is that they are predictions! A good example is natural gas as previously noted at the beginning of this commentary. Natural gas prices are one of the primary factors that determine generation levels from existing coal and natural gas-fired power plants. Natural gas prices have also been one of the most uncertain aspects of the short-term energy outlook forecast. In the past two months, the daily spot price of Henry Hub natural gas ranged from $7.20 per million British thermal units (MMBtu) in mid-December (higher in other markets due to location differences and infrastructure limitations) to $2.65/MMBtu at the end of January. Go figure.

Futures:

Henry Hub monthly futures for the next 12 months in March ranged from a high of $4.44 to a low of $3.00. EIA reported that US stocks at 2.114 Tcf — a 342 Bcf, or about 19%, surplus to the five-year average. Compared with levels a year earlier, stocks are now at a remarkable 451 Bcf or roughly 27%, surplus to 2022, the agency data showed.

Electric power prices still remain high in the CAISO daily market while ranging in the $85 MWh range for spot prices with term prices in excess of one year still north of $100 MWh in the Pacific Northwest with certain spot prices still north of $225 MWh at peak usage.

In the market world, commodities such as electricity and natural gas are just that... commodities, and therefore traded within the scope of many variables. At the enterprise level, understanding the data that tracts usage and cost information, and the integrity of that data and the analytics associated with that data, become equally significant and important.

If you are looking to enhance and insure that your data driven energy decisions and solutions are in concert with your short and long-term energy management goals, our Energy Intelligence platform and integrated advisory services coupled with our Carbon accounting and Sustainability Reporting capabilities, can help. Call us. 406-531-4432, Chuck Eubank

Sources: Energy Information Agency (EIA), S&P Global

James E. Morin/Chuck Eubank

Practical Energy Management Corp.

April 4, 2023