Summer 2012 officially began with a warm start at midnight on Wednesday, June 20with daytime temperatures in the Mid 90’s to +100 degrees farenheit in New England, the Mid-Atlantic and the Midwest. Meteorologists credit a high pressure system over the Great Plains that has allowed dry heat from the Southwest to move into the Midwest and extend into the East before a cold front moves in this weekend. Next week will bring cooler temperatures to the East but Texas will see its first shot of upper 90’s to +100 degree weather and ERCOT is already predicting record June demand above 66,000 MW from Monday, June 25 to the middle of next week.
These temperatures have lifted both gas and coal demand in the short term and reduced inventories. Despite the increase, both commodities still remain oversupplied.
The maps below show the deviation in temperatures for the current week (Jun 18-22) and the forecast for July. The high ridge over the mid-continent will keep the majority of above average temperatures over the central region of the Lower 48 along with the Rockies. This could pose risks in ERCOT where reserve margins for this year are just at the 13.75% recommended level for reliability. Day Ahead and Real Time prices could face increased volatility as loads approach record highs that exceeded 66,000 MW last summer.
The deviation in temperatures by as much as +15 degrees above normal in the East this week increased gas fired generation demand in the Northeast which spiked +47.2% from Monday (6/18) to Wednesday (6/20) according to EIA. Overall gas fired generation demand rose nationally by +7.1% week over week with the primary driver being the Northeast.
The above mentioned increase in gas fired generation demand resulted in higher cash gas prices for Northeast trading points as well as higher Day Ahead power prices. The charts below show Day Ahead gas and power prices for the ISONE Independent System Operator (ISO) as well as NYISO & PJM ISOs. As temperatures reached 100 degrees fahrenheit in the East this week, Day Ahead prices for gas on the Algoquin pipeline City Gate in NE settled as high as $7.05/MMBtu not just on increased demand but also due pipeline maintenance work that reduced flows of gas. ISONE Mass Hub Day Ahead On Peak (HE 8-23) averaged $152/MWH for 6/21 but has since come off as the peak of the heat has now passed.
The PJM West Hub, a major wholesale trading point and NYISO’s Zone J (NYC zone) both spiked on higher gas demand for 6/20-22 as gas prices at corresponding Transco pipeline NY and Non-NY receipt points were elevated.
Power customers should be aware that while over a period of time index pricing can be less than the forward price for power, during periods of high demand price volatility increases as demand spikes. In addition to elevated demand, a loss of generation or (forced outage) due to mechanical issues as well as gas pipeline or power transmission lines being derated can also cause price volatility especially if the elevated demand last for an extended period. Customers should understand the impact day ahead or real time index price volatility could have on their budget certainty.