Natural Gas Skyrockets Above $6

After a big gain on Tuesday, February 18, the March futures natural gas contract quickly exploded in price on Wednesday, jumping up over 9 percent past $6 per million British thermal units. At the time of this writing, it had surged $0.51 – a 9.15 percent increase – to $6.06/MMBtu. As evidenced in the one-week historical natural gas chart below, courtesy of barchart, prices have risen at a staggering rate in the last week alone – over 20 percent. Additionally, natural gas storage is very low; the level as of February 7 was 1,686 Bcf, a number 33.9 percent below where it was a year ago and 27.2 percent below the five-year average. Analysts believe storage may drop below 1 trillion cubic feet by the end of the winter. They also think that the dramatic increase in price is largely due to what has been an extremely cold winter. While the weather has certainly affected prices to a certain degree, the influence of the weather may be slightly overstated, as the futures contract is for March, and winter may be nearing its end.

NE Electricity Prices Set to Increase in Response to Capacity Auction

The Independent System Operator for New England (ISO-NE) released results on Wednesday, February 5 for the eighth Forward Capacity Auction for June 1, 2017 to May 31, 2018 it held on February 3. The auction produced 33,702 MW in capacity, 153 MW fewer than ISO-NE expects will be needed for the year mentioned above (33,855 MW). This is the first time the forward capacity auction has yielded less than the estimated power requirements; there had always been an oversupply. Gordon van Welie, ISO-NE president and CEO, indicated that the reason for this is that several major New England plants have planned shut down by 2017. They include the following power plants: 

Brayton Point in Somerset, MA (1,535 MW)

Vermont Yankee in Vernon, VT (600 MW)

Salem Harbor in Salem, MA (750 MW)

Norwalk Harbor in Norwalk, CT (350 MW)

Though the closings do not mean the region will not have enough power to operate in 2017-2018, it does mean electricity prices are set to increase in 2017-2018. 600 MW worth of demand response is also planning to retire; however, the closings are the primary reason for future increase. 

Janus Contributes to Natural Gas Price Spike

Natural gas prices soared Wednesday to their highest since June of 2011 in the aftermath of the winter storm Janus, which hit a large portion of the United States, hitting the Northeast and Mid-Atlantic very hard and even extended down the east coast as far as Georgia. The snow, coupled with extremely cold temperatures, raised demand expectations for heating fuel, pushing up natural gas. The February futures contract, for example, was at $4.71, at Wednesday’s market close, up a staggering $0.27 (6.18 percent) on the day.

 

The February futures contract has surged since the beginning of November – prices were as low as $3.50 on November 4, 2013 and have risen 34.57 percent in that time frame. Prices could rise even more with the Energy Information Administration releasing its weekly natural gas storage report on Thursday for the week ending January 17, 2014. In addition to the short-term increases due to weather, natural gas could see more long-lasting gains and reach $5.50 relatively soon due to fundamentals.

New Power Capacity Zone in New York to Increase Prices

The U.S. Federal Energy Regulatory Commission (FERC) decided on August 13, 2013 to allow the New York Independent System Operator (NYISO) to create a new capacity zone in the Lower Hudson Valley that includes New York City. The new zone will include current NYISO zones G, H, I, the three of which cover the Lower Hudson Valley, and J, which covers New York City. 

The idea for the new zone, designed to improve reliability and to promote new and existing generation and demand response program investments, was not without its detractors. At the onset, the Public Service Commission, New York Power Authority, and other utilities lamented the decision, pointing to higher power costs, by varying degrees based on class (residential, commercial, or industrial), in the current zones involved (G through J, but especially for G, H, and I).

The program, set to begin May 1, 2014, has already impacted pricing in the Lower Hudson Valley and in New York City. Suppliers expect a change in capacity charge (a cost component that is part of electric supply based on peak usage, i.e. how and when power is used) beginning in May; though, they are unsure of the exact change. Due to this uncertainty, suppliers have been conservative in pricing, driving up the cost of electricity in the aforementioned regions. Forward capacity charts project capacity prices to be higher starting in January. 

Power Prices Rise on Heels of an Algonquin Basis Increase

Forward power prices in New England spiked on Thursday and Friday due to a surge in Algonquin (AGT) gas basis. Basis for December almost doubled from Wednesday to Friday, increasing by $4.50/MMBtu, and the Algonquin winter strip (November-March) increased by $2.71/MMBtu as well. Traders, worried about pipeline constraints, did not want to get caught short, and a significant amount of buying, coupled with minimal selling, pushed the market upward. Colder-than-expected winter temperatures were also responsible for the pricing uptick. Natural gas pricing affects power (electricity) pricing, so power in New England followed suit. Additionally, prices in eastern New York rose on the market reaction.