Energy Market Update-September 2017
Edge Insights energy experts are constantly monitoring energy market conditions in order to help ensure the best possible pricing and contract terms for our clients. The following report is a snap shot of current conditions intended to help our clients stay informed of market dynamics.
Natural Gas Market Overview:
The futures natural gas market has been trading generally around the $3 mark since June, while bearish fundamentals for the short term continue. Due to the reduced electric generation demand from hurricane activity in Texas and anticipated market impact from Hurricane Irma, natural gas storage injections will increase, holding pricing down for the coming weeks. The price drop shown on the chart blow is a direct influence of this activity. Hurricane Harvey had a profound affect on gasoline refineries in Texas, but has had little impact on natural gas prices.
Natural Gas Storage Update:
The lower demand from hurricanes and cooler temperatures will allow more gas to flow into storage. It is difficult at this time to estimate the impact of Irma, but will include updates on future reports.
The storage report for week ending 9/1 shows the addition of 65 Billion Cubic Feet (Bcf). This is 0.5% above the 5-year average by 15 Bcf, and 212 Bcf below last year at this time. Current storage levels are now at 73.6% of total capacity.
Current Market Movers:
- Short term; the reduced demands for natural gas for electric generation in Texas from Hurricane Harvey and potentially Irma, along with cooler temperature forecasts for the eastern half the country will allow a much higher flow into storage over the next few weeks than original expected.
- Longer term; investors look out at the 3-month temperature forecasts (right), which indicate warmer than average temperatures for winter months for the entire United States.
Bullish: (higher prices)
- Longer term; the potential for end-of-season gas storage level to be below the 5-year average.
Over the past decade, retail electricity prices have not followed the general decrease in the cost of fuel used for generation. The average retail price of electricity in the United States has risen about 1.5% per year between 2006 and 2016, about the same as the 1.6% per year general rate of inflation over those years. In contrast, natural gas prices for U.S. electric generators, a key component in the cost of generating electricity, have fallen at an average rate of 8.4% per year since 2006.
The primary component of retail electricity cost is generation. This includes money spent on fuel, plant operation, maintenance, upgrades, and transmission on regional electric grids. Over the past decade, the portion of total electricity costs attributed to generation has decreased from 69% to 54%.
The secondary component of retail electricity cost is distribution by local utilities. These costs include distribution towers, poles, wires, substations, and communications equipment necessary to ensure reliable delivery of electricity to consumers. Distribution costs also include customer billing systems, consumer education, public relations, customer service centers and other services mandated by Public Utility Commissions such as rebate and efficiency programs. Distribution costs have been rising over recent years for many reasons. Primary reasons are upgrades to electric infrastructure that allows utilities to repair faults on transmission lines remotely, to read meters remotely, and to more quickly find, repair, and communicate with customers about neighborhood reliability problems and outages. Other infrastructure has been built to improve reliability and resiliency, to connect to new sources of electricity generation (including wind and solar), and to reduce transmission-line congestion in quickly growing areas. Other costs associated with electric distribution, such as administrative and general expenses, have also risen by 20% in real dollar terms since 2006, but these costs account for a smaller portion of the overall costs of providing electricity.
Electric delivery costs have increased in real 2016-dollar terms from 2.2 cents per kilowatt-hour (kWh) in 2006 to 3.2 cents/kWh in 2016, roughly offsetting the decrease in the generation cost. In many states the generation costs are deregulated and competitive while in every state the distribution costs are regulated by state Public Utility Commissions.
These costs are based on financial reports filed with the Federal Energy Regulatory Commission by major utilities and represent about 70% of all electric utility spending.
Source: U.S. Energy Information Administration, Federal Energy Regulatory Commission (FERC) Financial Reports, as accessed by Ventyx Velocity Suite
Natural gas prices, which directly affect the cost of electric, remain good.
The market opportunity is a ranking of how we perceive timing of contract purchases or hedging natural gas or electric.
Information provided by the Energy Division of Edge Insights, Inc.