Posted on

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

Posted on

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.

Blog 059 - image 04

Posted on

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

 

 

Posted on

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

Posted on

Natural Gas Market Update

Over the past 12 months, natural gas prices have fallen 52%.

Looking ahead, the graphs below each look at natural gas prices in the futures market starting at two different points in time: June 24, 2014 and January 5, 2015.  The first graph extends two years into the future and the second graph five years.  The “average price” represents the simple average of all of the futures month prices in each series.  Since June, natural gas prices over the future 24 months have fallen about 26% and over the future 60 months about 19%.

Natural gas (and electricity prices) are currently attractive making this a good time to consider locking in your supply needs.

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

Posted on

Are Crude Oil and Natural Gas Reconciling?

Crude oil prices have dropped 38% since June for two reasons.  Shale oil production in the US Bakken, Eagle Ford, and Permian basins has increased dramatically – by more than 4 million barrels per day since 2008.  At the same time, worldwide demand for crude oil has declined as a result of slowing economies in China and Europe.

Starting in January 2012, the US crude oil benchmark, West Texas Intermediate (WTI), bounced around $100/Bbl (dollars per barrel), rose above $105/Bbl in June this summer, and is now trading below $65/Bbl.  Natural gas prices fell below $2.00/mmBtu (dollars per million British Thermal Units) during April of 2012, rose above $6/mmBtu during the Polar Vortex during January of this year, and have since fallen below $4.00/mmBtu.

The graph below presents crude oil and natural gas prices on an energy equivalent basis in common units of $/mmBtu.  Starting in January 2012, crude oil bounced around $17/mmBtu, rose above $18/mmBtu in June this summer, and is now trading below $12/mmBtu.

We reported previously on the once wide gap between crude oil and natural gas energy equivalent prices:  Crude Oil and Natural Gas Get a Divorce and Crude Oil and Natural Gas Move To Different Hemispheres.

During April 2014, crude oil reached more than nine times the energy equivalent price of natural gas.  That ratio is now 2.8X.  The graph below shows how this ratio has fallen over the last three years.

While crude oil prices and natural gas prices exhibit little correlation, crude oil prices are highly correlated with fuel oil and diesel prices.  Implications of a declining crude oil to natural gas price ratio include:

  • As natural gas prices spike in pipeline capacity constrained markets this winter, it may be more economical to use fuel oil for power generation than natural gas.
  • The economics associated with converting residential fuel oil furnaces to natural gas become less compelling.
  • The economics associated with converting diesel or gasoline fueled vehicles to compressed natural gas or electricity will worsen, and the payback period associated with existing conversions will be extended further out in time.
  • US liquefied natural gas (LNG) exports will become less competitive in overseas markets where natural gas prices are contractually tied to crude oil prices.
  • Petrochemical facilities that can use both crude oil and natural gas as feedstock may switch more and more to crude oil.

It now appears that crude oil and natural gas may be moving back to the same hemisphere and, possibly, reconciling.

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

Notes:

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 2014 by Avalon Energy® Services LLC

Posted on

Real Electricity Prices (Energy Prices Always Go Up, Part 5)

This article is part of an occasional series that examines the common perception that energy prices always go up.  We have examined both electricity prices (read here and here) and natural gas prices (read here and here).

An article published recently by CNSNews.com states that, according to the Bureau of Labor Statistics (BLS), “The price of electricity hit a record for the month of October” and that “Americans now pay 42 percent more for electricity than they did a decade ago.”  Sounds scary.

Is it?  Let’s see.

Here, in graphical form, are the October US City Average electricity prices, in dollars per kilowatt-hour (kWh), as found on the BLS website.

During the period of time from 2003 to 2013, October electricity prices rose from $0.093/kWh to $0.132/kWh, a 41.9% increase.

It is important to note that the data above are in “nominal” dollars and do not account for the effects of inflation.  Over the time period examined, the purchasing power of a dollar has declined, so the electricity prices presented above are not being compared on a consistent basis.  In order to make the data consistent, we can normalize it by adjusting for inflation by converting the data to “real” 2013 dollars.  Another BLS dataset can help with this.

The BLS tracks changes in the purchasing power of a dollar through its Consumer Price Index (CPI).  The CPI can be used to convert dollar values from past years into inflation-adjusted dollar values for the current year.  For example, the 2003 electricity prices can be converted to 2013 dollars as follows:

Electricity Price 2013 = Electricity Price 2003 x (CPI Base Year / CPI Current Year)

Electricity Price 2013 = $0.093/kWh x (232.9/184.0)

Electricity Price 2013 = $0.118/kWh

The graph below shows the nominal electricity prices presented above along with the same data converted to real 2013 dollars:

The 42% increase on a nominal basis equates to only a 12% increase in real dollars.  Not quite so scary.

Looking further back in time, how have electricity prices behaved in nominal and real terms?

The graph below shows October electricity prices from the same BLS dataset for the period of time 1979 to 2013.

Over this period, October electricity prices have increased from $0.053/kWh to $0.132/kWh, a 149.1% increase.

The graph below shows the same data converted to real 2013 dollars:

In real 2013 dollars, October electricity prices have DECLINED from $0.170/kWh to $0.132/kWh.  This is a 22.4% decline in real dollars.

Do electricity prices always go up?  In real terms, no.

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 2013 by Avalon Energy® Services LLC    

Posted on

Day-Ahead and Real-Time Pricing in NYISO

We recently looked at the Day-Ahead and Real-Time electricity markets in PJM.  The New York Independent System Operator (NYISO) also operates a two settlement process with Day-Ahead (DA) and Real-Time (RT) markets, which are the subjects of this article.

First some background.

The NYISO, like only two other ISOs (CalISO and ERCOT), serves only one state.  New York State has a population of 19.6 million people, 8.3 million of whom  live in New York City.  NYISO recorded its maximum summer peak load of 33,939 megawatts during 2006 and its maximum winter peak load of 25,541 megawatts during 2004/2005.  NYISO is very dependent on natural gas as a fuel source and minimally dependent on coal.  The make-up of generation in NYISO is as follows:

The NY Control Area is broken up into 11 Load Zones, labeled A through K.  Across the state, electric power generally flows from west to east and from north to south.

New York Independent System Operator – Control Area Load Zones

Roughly a third of the load in NYISO is located in Zone J (New York City).  The next highest load areas are Zone K (Long Island) and Zone C (Central, which includes Syracuse and Ithaca).  The remaining eight zones account for less than 50% of the total load in NYISO.  See the tables below:

With so much load concentrated in Zones J (NYC) and K (Long Island), and with most of the electricity generation located outside of these zones, energy supply in these two zones is often constrained,   leading to higher pricing.  We will see this later.

The Day-Ahead market is a forward market in which hourly Locational Based Marginal Prices (LBMP) are calculated for the next operating day based on generation offers, demand bids, and scheduled bilateral transactions.  The Real-Time market is a spot market in which current LBMPs are calculated at five-minute intervals based on actual grid operating conditions.  The Real-Time market is also referred to as a “balancing market.”

The following analysis is based on NYISO hourly pricing data over the two year period ending June 30, 2013—a total of 17,544 hours.

The table below summarizes, by zone, hourly pricing in the NYISO Day-Ahead market.

Zones J (NYC) and K (Long Island) have higher average pricing and significantly higher variance in pricing than other zones, as highlighted by their maximum and minimum values.

The table below summarizes hourly pricing data for the Real-Time market.

Average pricing in the Real-Time market is about the same as in the Day-Ahead market.  However, the variability in prices in the Real-Time market is much greater across the board.  This stands out graphically as shown below.

The following graphs plot all 17,544 hourly Day-Ahead prices for both Zone A (West) and Zone K (Long Island).  The vertical scales are kept constant for comparison purposes.  The red lines on each graph are trend lines.        

And, the two graphs below plot all 17,544 Real-Time prices for both zones.

Another way to look at this volatility is to examine the standard deviation of prices.  The results are presented on the graph below.  Comparing Zone K to Zone A, Day-Ahead prices were 3.4 times more variable in Zone K and Real-Time prices were 2.4 more variable in Zone K.    

Separate from the level of volatility, especially in Zones J and K, average prices in all of the zones have fallen considerably in recent years.  Average prices in Zone J and Zone K are less than half what they were in 2008.     

Conclusions:

Real-Time prices are more volatile than Day-Ahead prices.

Zone J (NYC) and Zone K (Long Island) prices are more volatile than those of the other nine zones in the NY Control Area.

Notes:

– The New York Independent System Operator (NYISO) is a not-for-profit corporation that began operations in 1999.  The NYISO operates New York’s bulk electricity grid, administers the state’s wholesale electricity markets, and provides comprehensive reliability planning for the state’s bulk electricity system.

– Underlying data and the control area map are from the New York Independent System Operator.

– 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 2013 by Avalon Energy® Services LLC

Posted on

Day-Ahead and Real-Time Pricing During a Heat Wave

PJM operates two markets for energy, the Day-Ahead (DA) Market and the Real-Time (RT) Market.

PJM’s Day-Ahead Market is a forward market in which hourly LMPs (locational marginal prices) are calculated for the next operating day based on generation offers, demand bids, and scheduled bilateral transactions.

PJM’s Real-Time Market is a spot market in which current LMPs are calculated at five-minute intervals based on actual grid operating conditions.

How do the two markets relate?  Let’s use July 19, 2013 as an example.

During the day before (July 18), load serving entities (electric distribution companies and retail energy providers) submit to PJM their electricity usage forecasts for their load during July 19.  These forecasts, provided in one hour increments, together represent the aggregate PJM demand forecast for the delivery day, July 19.

Also, during the day before (July 18), electricity generators submit to PJM offers to supply energy during the delivery day, July 19.  These offers, also provided in one hour increments, together represent the total pool of supply PJM has available to match supply to demand.  Offers are zone specific.

Through its “least cost” dispatch model, PJM then sorts through the generators’ offers, accepting, for each one hour period for the delivery day, the least expensive offers first and then incrementally more expensive offers until it has enough supply to meet the forecasted demand.

As a great simplification, offers for the hour ending (HE) 1400 in the ComEd Zone may have looked something like this:

Below is a sample of actual accepted offers by selected zone for the July 19 hour ending 1400:

The graph below shows the Locational Marginal Prices (or the highest accepted offers) for each of the 24 hours of July 19 by selected zone.  Note that the vertical scale spans $0 to $240.

Then, reality happens.  Despite the best efforts on the part of retail energy providers to project usage, actual demand levels vary.  The weather is cooler or warmer than expected, commercial and industrial facility activity levels differ from what was projected, transmission lines become congested, substations fail.

Forecasted and actual (instantaneous) demand for July 19 is shown below:

Demand for electricity within PJM peaked at 156,944 megawatts at hour 1420 (2:20 pm).

During the delivery day, when actual demand is greater or less than what was procured in the Day-Ahead Market, energy is purchased or sold in the Real-Time Market to instantaneously match supply and demand.  Prices in the Real-Time Market during the hour ending 1400 were as presented below.  Note that in some zones the Real-Time price is higher than the zonal Day-Ahead price while at the same time, in other zones, the Real-Time price is below the Day-Ahead price.

Prices in the Real-Time Market over the full 24 hours of the delivery day of July 19 for select zones are presented below.  The vertical scale now spans $0 to $500.

Because prices are set every five minutes, prices in the Real-Time Market are more volatile than in the Day-Ahead Market, where they are set on an hourly basis.

In the Mid-Atlantic, July 19 was the fifth day of a heat wave.

Below is a contour map of Locational Marginal Prices as of 1605 (4:05 PM).

Below are both Day-Ahead and Real-Time prices during July 19, presented on one graph.

During this day, Real-Time prices were often higher than Day-Ahead prices.  This is not always the case.  Below is a graph of Real-Time and Day-Ahead prices during July 17, 2013.

Notes:

– “PJM” refers to the PJM Interconnection, which is a Regional Transmission Organization and operates the electric transmission system serving all or parts of Pennsylvania, New Jersey, Maryland, Delaware, the District of Columbia, Illinois, Indiana, Kentucky, Michigan, North Carolina, Ohio, Tennessee, Virginia, and West Virginia.

– Surface Heat Index map from Plymouth State Weather Center.

– Other data, maps and graphs from PJM.

– 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 story.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

Copyright 2013 by Avalon Energy® Services LLC

Posted on

Energy Prices Always Go Up (Part 4)

As discussed several times previously on this blog, there is a common perception that energy prices always go up.  We have examined both natural gas prices (read here and  here) and electricity prices (read here).

In this post, we look again at electricity prices—specifically, how they behaved in PJM last year.

PJM zonal day-ahead load weighted average Locational Marginal Prices (LMPs) averaged $50.92 per megawatt-hour (MWh) during 2010 and $45.19 during 2011, an 11.3% decline.  During 2012, this weighted average price dropped to $34.55 per MWh, a further 33.6% decline.  This is a stunning decrease and was driven primarily by the decline in natural gas prices.  Electricity and natural gas prices are strongly correlated in PJM as natural gas-fired generating units are generally the marginal units called upon in PJM’s least cost dispatch model.

LMPs vary significantly by zone, as shown on the graph below.

The change in average LMPs between 2011 and 2012 varied by zone but, in all cases, was lower during 2012.  The decline ranged from 19.4% in the Commonwealth Edison zone to 35% in the Atlantic City Electric zone.  A sampling of zonal price changes is presented in the table below.

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

From January 2007 to December 2012, Day Ahead LMPs in PJM averaged $46.57 per MWh.  This corresponds to the period during which PJM has in place its capacity market model, referred to as its Reliability Pricing model (RPM).  Current LMPs are well below this average, as shown in the graph below.

The LMPs plotted above are in nominal dollars and do not take into account inflation.  The effect of inflation can be illustrated by increasing the right side of the red line relative to the left side.  In other words, in real dollars, the decline in electricity prices in PJM is more dramatic than shown.

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

The Avalon Advantage – Visit our website at www.avalonenergy.us

Copyright 2012 by Avalon Energy® Services LLC