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Propane and Natural Gas – Birds of a Feather Not Flying Together

Propane is a versatile source of energy common in rural areas that are “beyond the main” of utility natural gas service.  It is often used for home space and water heating and cooking, as well as for agricultural uses such as crop drying, irrigation pump fueling, space heating in green houses, pig and poultry brooding, frost protection, standby electricity generation, and even food refrigeration.

Where does propane come from?

Propane is produced in association with natural gas (along with other natural gas liquids, or NGLs) and is also a byproduct of crude oil refining.  Because propane is a gas at atmospheric pressure, it is compressed into a liquid state under moderate pressure for storage and delivery.

The shale gas revolution has led to dramatic increases in natural gas production.

As previously reported, US natural gas prices have remained low for some time.  This is despite the existence of many influences that more recently would have driven natural gas prices upward (see Natural Gas Market Update, June 2018).

Because propane is produced in association with natural gas, along with the dramatic increase in US natural gas production has come a dramatic increase in US propane production.  As natural gas production has increased, so has NGL production.

With such an increase in propane supply, propane prices, like natural gas prices, are low – right?

No.

While natural gas prices have remained low (red line below), propane prices have risen significantly (blue line below).

    

Why?

Exports of propane from the US have grown and continue to grow.

Conclusion

Rural residential and agricultural customers who rely on propane rather than natural gas are not benefiting from the shale gas revolution to the extent that others are in the US.  Increasing propane exports are a major driver of this phenomenon.  This is another illustration of the complicated dynamics underlying energy commodity markets and an example of how those markets can change over time, often in unexpected ways.

Note:  Evelyn Teel contributed to this article.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484-8096, or email us at info@avalonenergy.us.

Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

Copyright 2018 by Avalon Energy® Services LLC

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Natural Gas Market Update, June 2018

Natural gas prices remain low and below their declining 21-year trend.  See graph below.

The prices presented here are for delivery at the Henry Hub in Southern Louisiana.  Natural gas prices in other producing areas of the US, such as Northeastern Pennsylvania, the Permian Basin, and the Williston Basin, are significantly lower.  The prices here are also in nominal dollars.  If plotted in real dollars, the downward trend would be even more pronounced (see These are Days to Remember).

Despite the current low price environment, there are a number of factors putting upward pressure on natural gas prices, including:

  • Increasing liquified natural gas (LNG) exports
    • Cheniere Sabine Pass trains 1-4 online
    • Cove Point terminal on the Chesapeake Bay ramping up
    • 11 additional liquification trains along the Gulf Coast in the works to come online in the next five years
  • Increasing pipeline exports to Mexico
    • Up more than 300% since the Great Recession
  • Increased industrial demand
    • Particularly in the petrochemical industry
  • Increased demand for natural gas-fired electricity generation
    • As coal plants retire
  • Natural gas storage levels down
    • Currently 25% below five-year average at this time of year

Given these influences, how do natural gas prices look in the futures market?  Low and continuing their decline.  See the graph below.

After peaking at $3.16/mmBtu during the winter of 2018/2019, natural gas prices remain below $3/mmBtu for the remainder of the 60-month forward period.

What is driving this?

Supply.  More specifically, dramatically increasing supply.

Natural gas production is up 7 Bcf/day from this time last year to 79 Bcf/day.  The US Energy Information Administration (EIA) projects US natural gas production will reach 83 Bcf/day by December 2018.

To see how much things have changed, read these older natural gas market updates:

Natural Gas Market Update October 2014

Natural Gas Market Update November 2013

Natural Gas Prices – Time to Hit the Panic Button?

Natural Gas Price – Looking Ahead January 2012

Natural Gas Price Drivers (January 2012)

As a result, natural gas (and electricity prices) are currently attractive—making this a good time to consider locking in your supply needs.

Note:  Evelyn Teel contributed to this article.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484-8096, or email us at info@avalonenergy.us.

Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

Copyright 2018 by Avalon Energy® Services LLC

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Balancing Congestion

The Federal Energy Regulatory Commission approved a change in PJM’s (the Mid-Atlantic grid operator) tariff, allowing them to shift what are called “balancing congestion” costs to load serving entities.  FERC approved PJM’s tariff revision with an effective date of June 1.  Suppliers have indicated that they intend to pass through these charges.  Suppliers include a change of law or regulation provision in their agreements.  Basically, they commit to a fixed price, but allow for pass-throughs when there is a change in law or regulation.  Please email or call to discuss the potential impact of these charges to you.

The Avalon Advantage – Visit our website at www.AvalonEnergy.US, email us at info@avalonenergy.us, or call us at 888-484-8096.

Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

Copyright 2017 by Avalon Energy® Services LLC

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In The News – Avalon Energy Services, LLC

In his year-end review titled, “Gas Industry Looks Optimistically at 2017,” PointLogic author Kevin Adler quotes our COO, Jim McDonnell.  Scroll down to the bottom of the report which you can find here.

The Avalon Advantage – Visit our website at www.AvalonEnergy.US, email us at info@avalonenergy.us, or call us at 888-484-8096.

Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

Copyright 2017 by Avalon Energy® Services LLC

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Peak Oil – A Dramatic Turn of Events

In our May 20, 2015 article, we wrote that “Concerns and worry about Peak Oil are overstated and irrelevant.”  The article concluded, “With crude oil supplies increasing and the demand for crude oil slowing, and likely to continue to slow more, demand for crude oil will peak long before dwindling supplies of crude oil become a concern.”  Read the full Avalon Energy Peak Oil article here.

Yesterday, eighteen months later, the Wall Street Journal reported that major and state-owned oil companies are beginning to plan for the “mind-bending scenario” when global oil consumption crests and begins a permanent decline.  In response to this “peak oil demand,” these companies are beginning to increase their investments in petrochemicals, natural gas, cost reduction and alternative energy sources like solar and biofuels.

And, no less an industry player than Saudi Arabia is at the forefront of this trend.  Saudi Arabia’s energy minister, Khalid al Falih is quoted in the WSJ article as stating at a recent conference, “Peak demand will be later than the common dates that are being thrown around, but if it does happen, because we’re building multiple engines for the economy and we’re planning for an economy beyond oil, we’ll be ready.”

A dramatic turn of events.  Predictable, but dramatic nonetheless.

Reference – “Oil Firms Anticipate Day of Reckoning,” The Wall Street Journal, November 28, 2016.

Evelyn Teel contributed to this article.

The Avalon Advantage – Visit our website at www.AvalonEnergy.US, or call us at 888-484-8096.

Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

Copyright 2016 by Avalon Energy® Services LLC

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Separate Paths – Part 2

By Ana Rasmussen, Intern

Our last blog post Separate Paths – Part 1 looked at how electricity distribution costs have been rising since 2008 and many of our readers have had questions about just why this is happening.  In order to explore this, and to try to get some answers, I dove in and analyzed seven years’ worth of Pepco electric bills from a representative home in Pepco’s Maryland service territory.  Before sharing my findings, I want to acknowledge that my base data is just from one household, which can be problematic for making generalizations.  However, the kWh rates for individual charges should be representative and similar for other residences in the area over these years.  I cannot account for differences in usage from one household to the next, but I believe this can shed some light on the larger shifts taking place within the utility cost structure.

First, once all of the data was collected and organized I looked at the percentages of the total bills that were from electricity distribution, transmission and generation.  As you can see in the charts below, a drastic transformation has taken place.  In 2009 distribution charges accounted for 24.6% of the total bill, but by 2015 it makes up 41.7% of it. The portion of the bill coming from transmission charges also more than doubles during this period resulting in generation’s share to fall to just over 50% of the total bill.  While generation’s portion of the bill has been falling, transmission and distribution have been on the rise since 2009.

Next, I decided to focus on distribution and breakdown the individual rates and charges included under distribution on the Pepco bills.  The four most important components of the distribution charge, and the way in which they are charged, are as follows:

Please note Pepco’s distribution energy charges are different from their generation energy charges.  Generation energy charges represent the cost of procuring energy for customers.  Distribution energy charges represent the cost of providing electricity delivery services to customers.  These distribution energy charges are billed on a kilowatt-hour usage basis.  So, while they are referred to as “energy charges,” they do not relate to the procurement of energy, only to the delivery of energy.

The customer charge is a flat rate charged once a month. Over this period, the charge has gradually risen from $6.65 to $7.39 a month. In the chart below you can see the yearly average rate for the other three primary components of distribution.  Although the Montgomery Country Energy Tax has fallen slightly since 2009, both distribution energy charge and Empower MD charge have risen.

Throughout this time period the average yearly distribution energy charge has been increasing, but to get a better understanding of it on a unit rates basis, I charted them by month. Below you can see how the rate falls in the winter months and rises during the summer months. Over the seven year period, the distribution energy charge has increased, on average, about 6.8% per year.  Also notable is the growing distance from peak to trough each year.

After an in depth look at seven years’ worth of residential Pepco electric utility bills, the shifts in generation, transmission and especially distribution have become more clear. Although far from perfect due to a lack of access a broader set of data, I hope that this analysis has been able to provide some insight on current trends and answer some of your questions.

The Avalon Advantage – Visit our website at www.AvalonEnergy.US, call us at 888-484-8096, or email us at jmcdonnell@avalonenergy.us.  Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.  Copyright 2016 by Avalon Energy® Services LLC.

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Separate Paths – Part 1

By Ana Rasmussen, Intern

Since the shale boom began in earnest during 2008, natural gas prices in the US wholesale market have fallen dramatically. Prices have hovered within the 2 to 6 dollar per million Btu (mmBtu) range over the last few years, with the prompt month NYMEX natural gas contract trading at a remarkably low $1.70 mmbtu today. As we have been reporting for some time, wholesale electricity prices have also experienced a similarly dramatic decline, although that relationship has been weakening in recent months (see Natural Gas and Electricity Are Parting Ways – Part 1 and Natural Gas and Electricity Are Parting Ways – Part 2).  Given the decline in wholesale electricity prices, many of our readers have asked us why they have not seen a similar decline in their home electricity bills.

To answer this question we examined electric utility bills from a typical Maryland residence from the last 10 years and broken down the different charges included in the total cost. First, if you single out generation and transmission (G&T) charges during this time period, you can see in the graph below that they have been more or less in decline since the end of 2008. G&T charges represent the costs of producing electricity and of moving high voltage electricity from generation facilities to distribution lines.

However, this does not give us the whole picture. Our electricity bills are not only based on G&T, but distribution costs as well. As you can see below, while generation and transmission have been declining, distribution charges have actually been rising. Distribution charges include the costs of maintaining, expanding and improving the electric system to deliver electricity from high voltage transmission system to customers, homes and businesses, as well as the utility’s depreciation expense and return on rate base.  Other components of distribution costs include, but are not limited to, grid resiliency, environmental surcharges and county energy taxes.

Ultimately, simultaneously falling G&T charges and rising distribution charges are to blame for the lack of change in our electric utility bills at home, even with wholesale prices so low. In the final graph you can see the total utility bill charges have remained relatively stable as a result of this gradual cost shift from G&T to distribution over the last few years.

The Avalon Advantage – Visit our website at www.AvalonEnergy.US, call us at 888-484-8096, or email us at jmcdonnell@avalonenergy.us.  Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.  Copyright 2016 by Avalon Energy® Services LLC.Blog 058 - image 04

 

 

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Natural Gas and Electricity Are Parting Ways – Part 2

In our last article, Natural Gas and Electricity Are Parting Ways – Part 1, we explored the weakening correlation between wholesale natural gas prices and electricity prices in the Mid-Atlantic.  While natural gas prices have fallen dramatically over the past seven years, and electricity prices have fallen as well, electricity prices have not fallen as far.  We discussed how this weakening relationship is, in part, a result of natural gas-fired generating units more and more often being dispatched before coal-fired units.  In this article, we look at the influence of capacity prices.

Capacity

The cost of energy delivered by a competitive supplier consists of several elements—generation, capacity, transmission, and ancillary services.  Costs to suppliers resulting from PJM’s energy auctions are reflected in competitive suppliers’ generation charges.  Competitive suppliers are also required to own or to reserve generation capacity.  PJM runs separate capacity auctions to place a price on this capacity.  These auctions establish capacity prices for each of the three consecutive future planning years.

Polar Vortex 

During the depths of the Polar Vortex of January 2014 (see What Does Volatility Look Like?), there were times when more than 20% of generation capacity in PJM was unable to respond when dispatched by the grid operator.  The grid operator then had to call upon non-economic (meaning more costly) resources to fill in, some of which also were unable to respond.  The grid came within a few thousand megawatts of brownouts, and prices soared to more than $2,600 per megawatt hour during some hours.

Capacity Performance

Clearly more reliable generation capacity was required.  PJM proposed, and the Federal Energy Regulatory Commission (FERC) approved, a change in regulation creating a new Capacity Performance product.  With Capacity Performance, PJM established new, more stringent requirements for generation regardless of weather conditions and system conditions, and also established onerous penalties in the event that generation does not respond when called.  Most generators bid their capacity again during two Transitional Auctions, for the planning years 2016/2017 and 2017/2018. As a result, due to this change in regulation, capacity prices have been reset higher for each of these two planning year periods.

The table above presents, for the 2016/2017 and 2017/2018 planning years, capacity prices that were originally established as part of Base Residual Auctions (BRA) and the new prices established as part of Capacity Performance (CP) Transition Auctions.

Additional investment was clearly needed in order to improve system reliability.  PJM’s strategy with Capacity Performance is, on the one hand, to provide generators “resources to invest in improvements in such areas as dual-fuel capability, securing firmer natural gas supplies and upgrading plant equipment,” while, on the other hand, imposing substantial penalties for non-performance.

These increased costs associated with Capacity Performance, which will be reflected in electricity prices, are unassociated with changes in natural gas prices and are another driver of the decline in correlation between electricity prices and natural gas prices.

Notes:

– Evelyn Teel contributed to this article

– Capacity prices and quote from PJM website

The Avalon Advantage – Visit our website at www.AvalonEnergy.US, call us at 888-484-8096, or email us at jmcdonnell@avalonenergy.us.  Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.  Copyright 2015 by Avalon Energy® Services LLC

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Natural Gas and Electricity Are Parting Ways – Part 1

In recent articles, we have explored the dramatic decline in natural gas prices over the past seven years.  See These Are Days To Remember and 10,000 Maniacs Were Right.

In the US Mid-Atlantic, natural gas and electricity prices have, over time, tended to move together.  While there has by no means been a perfect correlation between the two, the relationship has been strong.

Over the past 15 years, the coefficient of determination (R2) has averaged about 67% (see yellow line).  In other words, over this time period, 2/3 of the change in electricity prices can be explained by changes in natural gas prices.  More recently, however, the strength of this relationship has weakened and continues to weaken further (see red line).  Electricity prices have declined but not as precipitously as those of natural gas.

Why has this relationship weakened?  Two significant drivers relate to (i) dispatch order and (ii) capacity prices.

Dispatch Order

In scheduling energy to serve electricity users, the grid operator, PJM, utilizes a least-cost dispatch model.  PJM develops an expectation of projected system load on an hourly basis and then seeks bids from generators to supply energy to serve this load.  After bids have been submitted, for each hour, PJM accepts the lowest cost offers first and then works their way through higher price offers until sufficient supply has been cleared to match the projected load.  (There are a number of system constraints and complications that must be incorporated into the process, but this pretty much captures it.)  For each hour, the price at which the last megawatt-hour (MWh) clears sets the price for all the supply offers that clear in that hour.

For many years, the last generating units cleared were generally natural gas-fired units.  As a result, it has been these natural gas units that have set the price for electricity, leading to the strong link between natural gas prices and electricity prices.  A common understanding was that “as natural gas prices go, so go electricity prices.”

But now, low natural gas prices are leading to lower and lower supply bids by natural gas-fired generators, causing them to more frequently fall down the dispatch order and clear before coal-fired units.  Because of this, coal fired units are now more often becoming the marginal, or price-setting, units.  And, as a result, falling natural gas prices have not driven down electricity prices to the extent they once would have.

In addition to procuring energy, electricity wholesale suppliers must also own or procure capacity.  In our next article, we will look at how capacity costs influence electricity prices.

Evelyn Teel contributed to this article.

The Avalon Advantage – Visit our website at www.AvalonEnergy.US, call us at 888-484-8096, or email us at jmcdonnell@avalonenergy.us.  Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.  Copyright 2015 by Avalon Energy® Services LLC

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10,000 Maniacs Were Right

The dramatic decline of natural gas prices was the focus of our last article (These Are Days to Remember).  As we noted then, in real dollars, natural gas prices were near all-time lows.  Since then, natural gas prices have continued to fall.

Yesterday the November futures contract settled at $2.033 per mmBtu.  The last time the November contract was this low was 17 years ago in 1998, when it closed at $1.97 per mmBtu.

The “winter strip” is the simple average of natural gas futures prices for the five month period of November, December, January, February, and March.  These five months represent the winter heating season, when demand for natural gas is historically the greatest and natural gas prices, correspondingly, are generally highest.

With the rolling off of the November contract yesterday, the 2015/2016 winter strip closed out at $2.349 per mmBtu.

The graph below puts this into perspective by comparing the current winter strip (in red) to that of previous winters.

Incredible.  These are days to remember.

Evelyn Teel contributed to this article.

The Avalon Advantage – Visit our website at www.AvalonEnergy.US, call us at 888-484-8096, or email us at jmcdonnell@avalonenergy.us.  Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.  Copyright 2015 by Avalon Energy® Services LLC