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Energy Prices Always Go Up (continued)

As discussed on this blog, there is a common perception that energy prices have been, and continue to be, on a one way path upwards.  In previous posts we focused on natural gas and showed that rather than rising, natural gas prices have, in fact, fallen dramatically, over both the short run and the long run (see here and here).

Electricity prices in PJM continued to fall last year as well.

First some background.  PJM is the independent electric grid operator in the Mid-Atlantic and parts of the Mid-West and is responsible for the reliability of the electric transmission system and, equally importantly, managing the market for wholesale electricity and related services throughout its operating territory (as well as into and out of PJM).  Below is a map of the territory PJM covers.

PJM has many pricing points individually referred to as locational marginal prices (LMPs).  LMP is the pricing mechanism for wholesale power in PJM.  LMPs vary by location when transmission congestion exists.  LMPs can be nodal or zonal.  Nodes refer to specific buses.  Zonal LMPs correspond to PJM transmission zones.  Energy prices are established in both the day-ahead and real-time markets.  When referring to LMPs over time, they are often presented as “average prices” or as “load weighted average prices.”  The later accounts for the amount of load at a node or in a zone during each hour over the total measurement period.  All in, PJM keeps track of over 10,000 LMPs.

So, back to the story.  During 2010, PJM zonal day-ahead load weighted average locational marginal prices averaged $50.92 per megawatt-hour (MWh).  This weighted average price dropped to $48.69 per MWh during 2011, a 4.4% decline.  LMPs vary significantly by zone, as shown on the graph below.

The change in average LMPs between 2010 and 2011 varied considerably by zone.  LMPs dropped about 10% in the PSEG and Pepco zones.  There were some exceptions to the overall decline in LMPs, such as in the AEP zone, in which the average LMP increased.  A sampling of zonal price changes is presented in the table below.

This overall decline can also be seen in the contraction of prices into the lower end of the frequency distribution shown below.

From January 2001 to the present, LMPs in PJM have averaged $55.81 per MWh.  Current LMP prices are well below this average, as shown on the graph below (in red).


Do energy prices always go up?  The answer is “no” as it relates to electricity and natural gas prices.

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

Copyright 2012 by Avalon Energy® Services LLC

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Cape Wind

It was recently reported that a power purchase agreement between National Grid and Cape Wind was approved by the Massachusetts Supreme Judicial Court. National Grid is committed to purchasing half of the output of the project at a starting price of 18.7 cents per kilowatt-hour. This price will then escalate 3.5% per year for 15 years.

With this 3.5% annual compounding, the contract price will reach 30.3 cents/kWh in the fifteenth year. Over the term of the agreement, the average price from Cape Wind will be 24.1 cents/kWh. How do these prices for wind generated electricity compare to historical electricity prices in New England?

The above graph shows the daily price of electricity in NEPOOL over the period of time spanning 2001 through 2011 (blue line). NEPOOL is New England’s bulk electric power market. In New England, as is the case elsewhere, electricity prices exhibit considerable volatility. Over this eleven year period, daily electricity prices have been as high as 31.2 cents/kWh and as low as 2.5 cents/kWh, and have averaged 6.3 cents per kWh (red line).

Electricity prices in New England have been declining. Since the beginning of 2009, daily electricity prices have averaged 5.2 cents/kWh.

So, how does the cost of electricity from the Cape Wind project compare to historical prices in New England? In order to provide a visual sense, the two graphs above are reproduced below, each modified to have the same vertical axis scale. In both cases, the horizontal red line represents the historical average wholesale price of 6.3 cents/kWh.

Cape Wind’s website describes their project as consisting of 130 wind turbines that can produce up to 430 megawatts of electricity. Assuming a 25% capacity factor and the application of both the historical average NEPOOL price and the average Cape Wind contract price to the total projected output of the wind farm, the annual difference in cost is estimated to be $167 million.

The Cape Wind project represents a large, long position in what today is expensive electricity with a fixed escalator. This analysis is limited and does not reflect future price movements (up or down) in the cost of electricity associated with the existing and future fleet of generation in New England nor the environmental, social and operational costs and benefits associated with the existing and future fleet of generation and the Cape Wind project.

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

Copyright 2012 by Avalon Energy® Services LLC

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Best Friends? – Natural Gas and Electricity Prices

We have looked at historical and forward natural gas prices. How have electricity prices been behaving?

The graph above shows the monthly average of electricity prices at PJM West (a trading hub where electric generation is concentrated) spanning the 131 month period of time of January 2001 through November 2011. Like natural gas, electricity prices peaked during 2008, declined, recovered somewhat, and then declined again. The relationship between electricity prices and natural gas prices can be seen better in the graph below:

Please note that in this graph electricity prices have been converted to cents per kilowatt-hour. When plotted together, electricity prices and natural gas prices seem to track closely, and the reality is that they are closely related. In the Mid-Atlantic, electricity prices and natural gas prices are strongly correlated. Natural gas fired generating units are usually the marginal units called upon by the grid operator and, as such, set pricing in the wholesale markets. So, generally in the Mid-Atlantic, as natural gas prices go, so go electricity prices.

While electricity price and natural gas prices tend to move together, the relationship between the two does change over time.

The graph above shows the correlation on a rolling 24 month basis. Over this period, the correlation between electricity and natural gas averaged 71% but has been as high as 97% and as low as 21%. The weakest correlation was during 2008, when natural gas prices moved upward more vigorously than did electricity prices. After having moving up to 97%, the correlation has been declining over the last two years.

In the above graphs, you can see how over the last two years, electricity prices have recovered more strongly than natural gas prices, leading to declining correlations between the two.

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

Copyright 2012 by Avalon Energy® Services LLC