View Page As PDF
Share Button
Tweet Button

The opening of electric utility bills throughout much of the Eastern United States has recently become a monthly exercise of shock followed by a scramble to find the funds to pay the skyrocketing sums.

Beginning in the fourth quarter of 2011, wholesale electric prices began a steep and long decline that flattened through 2013.   This decrease was largely attributed to the dramatic reduction in the price of natural gas resulting from the abundant production of shale gas through the use of new and sophisticated hydraulic fracturing technologies – particularly in the Marcellus and Utica Shale footprints throughout Ohio and Pennsylvania.  As natural gas became a more affordable fuel source, many electric generators began to switch to natural gas from coal.  As a result, the price of coal also began to decline as well making the fuel component of electric generation the lowest it has been in years.

chart.png
In January of 2014, a convergence of factors caused prices to sky rocket.   Just after the New Year, temperatures began to plummet to well below zero in the mid-west and the Atlantic coast.   Nearly 20% of the power generating capacity serving over 60 million people was sidelined as natural gas supplies ran low, coal piles were frozen and unusable, and sensitive operating equipment failed to work properly.  As a result, the wholesale price of electricity rose from around $0.05 cents per kilowatt hour to over $2.00 – more than 40 times the normal rate (see the chart above).

This “Polar Vortex”, while causing dramatic short term pain, exacerbated the problems of an increasingly fragile and stressed electric system.  As a result of nuclear power plant retirements, the closing of coal fired plants to comply with Obama Administration pollution regulations, an overloaded natural gas pipeline system, and insufficient gathering lines to get the local shale gas from the well to market resulted in electricity prices that were beginning to rise notwithstanding the sucker-punch from the extreme weather.

Adding to the structural factors, the additional power needed to meet the demands of the Polar Vortex severely drained the storage of natural gas supplies to a level that has not been experienced for a decade.  The race to inject natural gas back into storage before the winter heating season begins has resulted in sustained increased prices in natural gas and added uncertainty to the electric power curve pricing.  This has resulted in near term price increases.

Recently, Philip Moeller of the Federal Energy Regulatory Commission stated, “We are now in an era of rising electricity prices” as a result of the continuing reduction of electric generating capacity.  More power plants are scheduled to be retired in 2015 in the Mid-West than any time in history.  Electric usage continues to remain steady or increase thus subjecting pricing to the basic laws of supply and demand.  With a decreasing supply and a stable demand, pricing typically increases.

Anticipated increases in natural gas exports by pipeline to Mexico and through overseas sales of liquefied natural gas (LNG) - which has gained new urgency as a result of Russia’s aggression in Ukraine – are expected by most experts to keep natural gas prices in the $4 - $6 per mcf range for the foreseeable future.  Given the trend in recent years of the price of electricity closely tracking the price of natural gas, most experts see little relief in pricing for electric consumers.

While the shock of higher electric bills may wear off, the likelihood is that the increased pricing is here to stay.

fgraft is the President of Worthington Energy Consultants which assists clients to maximize the value of their energy spend. fgraft@worthingtonenergyconsultants.com

COMMENT
+