Wednesday, May 14, 2014

15 Takeaways for Energy Buyers

Guest Blog by Constellation

  1. Power & Gas Prices Track Together: Power prices track closely with natural gas prices and gas fundamentals are used as leading indicators to identify power price trends. Gas prices for 2013 were +35% over previous year.
  2. Weather Matters: Weather continues to be one of the most important factors influencing both energy demand and pricing. Winter weather drove both to new highs. You may want to secure some of your summer and winter electricity and gas supply prices to avoid price spikes.
  3. Plan for the Summer: Preliminary National Weather Service Summer forecast is calling for a hot summer along the East Coast and West Coast. Hot weather also expected for the South, with normal temperatures for the Midwest. Note that although the Midwest forecast is currently calling for normal temperatures you should consider planning for unexpected volatility.
  4. Increased Energy Demand Led to Lower Gas Storage & Higher Prices: Higher residential & commercial load was a key driver of record energy demand.  Year over year, this resulted in the need for an average 6 Bcf per day more of additional gas drawn from storage this winter.
  5. Natural Gas Production is Keeping Long Term Prices Down: Natural gas production hit a new all-time record in January and along with additional drilling efficiencies, production continues to grow.  The expected growth in production for 2014 of approximately 2.5% is one of biggest factors weighing down long term prices beyond 12 month strip. Now is a good time to take advantage and secure power or gas prices for the 2016-2019 timeframe (even if you have a contract for the near term).
  6. Natural Gas Storage Inventories are at 11 Year Lows: Record cold has reduced gas storage to 11 year lows and we will need to inject a record 2,600Bcf from April through October in order to return storage to at least 3,500 Bcf for the upcoming winter. Regional inventories are all below 5 year minimum levels and inventories in the Great Lakes region are low and facing continued heating demand in early April, which could exacerbate basis volatility in near term cash markets. The storage deficit/surplus ratio on a year-over-year basis has a high correlation to the 12-month gas strip and, until it begins to narrow, higher prices will likely be required to ensure enough gas injections into storage on a weekly basis.
  7. Regional Price Volatility: Severe cold weather fueled by the polar vortex in January and February reduced available pipeline capacity from storage to 0%. This caused volatility in spot cash markets during the January through March period.
  8. Nuclear Outages May Come at a Bad Time: An elevated level of nuclear plant outages this spring could mean an incremental demand for gas fired generation. This would shift gas to generation use at a time when storage injections need to be higher than normal.  A higher than average number of nuclear units are coming to the end of their 18 month fuel cycle this spring and so gas demand could be elevated in April and May.
  9. Coal’s Potential Effect on Next Winter Prices: Coal plants may displace some gas units until the storage deficit is reduced but coal inventories for power generation are extremely low this spring as well due to high winter demand and rail delivery issues.  If coal units struggle to rebuild inventories and storage is below 3,600 Bcf on November 1st, there could be increased chances for volatile prices next winter too. Spring is a great time to secure winter prices.
  10. The Drought and West Coast Supply: California is facing a record drought and low gas inventories.  Hydro output is currently 1,000 MW lower compared to this time last year and is not expected to improve.   Solar capacity, which is increasing, is now likely to help offset the effects of the lower hydro output but low gas storage levels could lead to higher gas and power prices.
  11. U.S. Demand Looks to Grow: U.S. energy demand growth is currently higher than the world average and is projected to further expand due to changes in power stack, industrial sector, vehicle application and LNG exports. DOE’s approval of the Jordan Cove LNG export license brings the total to 7 licensed facilities and the first on the U.S. West Coast (which will help supply Asian markets). Jordan Cove will still require FERC approval but this increases total approved export volume to above 9.4 Bcf/d and could lead to higher long term prices beyond 2016.
  12. Coal Plant Retirements Put Upside Pressure on Markets: The first wave of retirements were older, smaller coal units that ran only seasonally while this next wave will include more base-load units, which will require substitution by natural gas plants. This can increase gas demand and keep upside pressure on gas prices.  EIA estimates 60 GW will retire by 2020 with 90% of retirements occurring by 2016 to comply with the EPA’s Mercury Air Toxic Standards (MATS) rule.
  13. Gas Prices are Trending Up: Gas prices have steadily trended upward since hitting a 10-year low back in April 2012 and have recently been subject to extreme price volatility due to a historically cold winter the past three months.
  14. Use Long Term Contracts to Lower Your Rate: As a result of recent volatility and price pressure in the short term, customers may see better pricing for longer-term contracts. Contracts that blend in long-term prices can give you a better rate today.
  15. Winter’s Painful Lesson about Risk Management: This winter’s volatility has been a painful reminder that budget stability and price protection are key building blocks for an effective energy procurement strategy. With increased demand, pending coal retirements and winter pipeline limitations, future peak seasons may be ripe for more unexpected volatility. A stable supplier and a strategic energy plan can help you take advantage of market opportunities and mitigate the effect of price spikes.
SUMMARY: Forward markets are still near all-time lows.  Understand evolving market risks and options to manage that risk. Define goals/objectives and manage cost (through both energy price AND energy consumption) over time. Establish price targets to capitalize on pullbacks and protect against upside risk.

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