Energy Management Year In Review: What’s Ahead for 2016?

After the bitter cold of 2014, the mild start to 2015 was a relief for energy managers in many ways, but the year was not without its challenges.

Now, as we welcome 2016, we find ourselves looking back at the last year for clues about what trends in energy management, pricing and regulations we can expect for the year ahead.

Here are a couple significant energy trends we experienced from the past year and what they will likely mean for us this year.

1. What We Saw in 2015: The Grid Was Better Prepared to Meet Energy Demand

At this time last year, it seemed only natural for analysts and key stakeholders to raise concerns about capacity on the PJM grid, which serves approximately 52 million people in 13 states, to handle increased demand due to record-breaking cold. After all, some generators failed to deliver on commitments to meet demand during the 2014 Polar Vortex. Energy managers who had not locked in prices felt the impact of market volatility through additional costs related to capacity shortfalls.

Fortunately, PJM system operators were better prepared for extreme cold in 2015. Thanks to a number of improvements, they forecasted energy load more accurately and improved coordination with generators and gas pipeline companies to meet demand.

Although below-zero temperatures in February resulted in PJM setting a new wintertime peak demand of 143,086 megawatts, the real-time locational marginal pricing—prices that factor in the differences in load, generation and physical limits of the transmission system in various areas—did not exceed $418.67 per megawatt.

That was a stark contrast to 2014 during the peak of the Polar Vortex, when Real Time LMP prices surpassed $1,800 per megawatt. Ancillary prices peaked at just over $600 per MWh in 2015, less than one-fifth of what they were when they hit $3,300 in 2014.

What We Expect in 2016:

PJM recently released its 2016 Load Forecast Report, which predicts peak demand for summer and winter through 2032 will be slightly lower across most geographic zones than was predicted in 2015.

Overall, PJM projects the annual peak load growth to be a modest 0.6 percent per year over the next 10 years with the southernmost electric distribution companies, including southern Pennsylvania, experiencing the most significant growth. At 1.6 percent, Dominion is the only company projected to see load growth above 1 percent on an annualized basis.

It’s also important to note PJM has significantly revised its forecasting model since its last annual report to provide more variable load response to weather across a wide range of conditions. In making its forecasts, it now includes distributed solar generation in historical models and considers weather patterns from only the past 20 years, as opposed to the past 40.

These changes should ensure the grid is better prepared for the impact of weather, population and supply changes due to an increase in renewable energy.

2. What We Saw in 2015: Falling Natural Gas Prices

In 2015, the Henry Hub natural gas price fell below the $2 mark for the first time since 2012 as a result of record-setting production, weak demand and record-high gas storage levels. An increase in shale-gas production and an improved infrastructure to transport natural gas, as well as the expiration of November futures contracts ahead of the end of the Atlantic hurricane season were also factors that contributed to the decline in natural gas prices, according to an October 2015 Market Watch report.

As gas prices dropped, power prices followed. The average day-ahead power price for West Hub was 28 percent lower in 2015 compared to 2014.

What We Expect for 2016: Natural Gas Prices Will Bounce Back

The U.S. Energy Information Administration’s (EIA) most recent Short-Term Energy Outlook shows Henry Hub spot prices averaging $2.65/MMBtu in 2016 and $3.22 in 2017, compared with an average of $2.63 in 2015. Although projected prices this year aren’t much higher than last year, the EIA expects natural gas prices to begin to recover in 2016 as lower prices drive demand and declining rig activity impacts supply.

However, prices should remain soft in the short term assuming there are no significant weather events or significant production cuts.

The chart below from the EIA shows historic and projected natural gas consumption across the commercial, industrial and residential sectors.

This chart from PJM shows how natural gas prices spiked during the Polar Vortex of January 2014 and have dropped since then.

A Stable Energy Provider: The Next Best Thing to a Crystal Ball

These trends will be important to watch in the coming year as you plan your energy management strategy and consider energy purchasing options. While the projections take many factors into account and are based on reliable sources, there are a number of “wild card” factors that impact energy prices, including weather and regulatory changes.

No one knows for certain what the future holds, but having a stable energy provider in your corner is the next best thing to having a crystal ball.

Constellation offers a variety of energy purchasing solutions to help you prepare for pricing risks and better manage your energy use. A blended purchasing strategy that incorporates both fixed and index pricing is one way to mitigate pricing risks that could impact your bill and achieve greater budget certainty.

Our energy management experts can provide information on the latest market trends and offer recommendations based on your company’s objectives.

To determine which energy management options are best for you in 2016, contact us today.