Fall Energy Market Outlook: Prices Rebound After Record Lows

Call it a comeback—energy prices appear to be on the rebound after a summer of strong demand and declining supply.

In our latest webinar, we discussed some of the highlights of the past few months and offered a glimpse at what customers can expect to see this fall. The fall energy market outlook has been impacted by several factors, including the third-hottest summer on record nationally, dwindling gas production and below-average gas storage injections.

A few highlights to note:

• U.S. gas production declined for five straight months since peaking at an all-time high in February.
• The gas storage refill pace has been 40 percent slower than a year ago, and storage injections have been below average for 14 straight weeks.
• Electricity from natural gas is on track to exceed coal-fired generation for the first time on an annual basis.
• NYMEX prompt month gas has rallied from a 17-year low of $1.61 to a one-year high of $3.
• Cal 2017-2020 NYMEX prices have rallied from spring lows and are holding steady around $3.
• Cal 2017-2020 forward power prices have rebounded from all-time contract lows, although they are declining again in some markets.

These factors have brought us to where we are now and hint at what’s to come. Here are a few things customers should consider as they plan their energy purchasing strategy in the months ahead.

Rising Index Power Prices

Electricity prices are usually highest in the summer when demand for air conditioning is highest. Because the real-time cost to supply electricity varies throughout the day, most consumers pay prices based on seasonal average costs. Costs also vary by region.

Index power prices reflect these seasonal and regional differences, serving as an important indicator of trends.

As the chart below shows, hotter than normal summer temperatures and rising natural gas prices are creating the perfect recipe for increased index prices and greater volatility. Prices this summer are already averaging at or above year-ago levels in several markets, though they remain at historically low levels.

(Source: Constellation)

Forward Power Prices

Forward power prices show future trends that are likely to occur, based on what has happened in the past six months. As this next chart shows, forward power prices declined in most regions as the natural gas market rally stalled. Energy prices typically hit seasonal lows in August or September, so energy buyers should look for opportunities to lock in these low prices while they can.

(Source: Constellation)

Numerous factors impact these regional pricing trends, including state legislation and coal retirements that affect electricity generation.

For instance, New York approved a Clean Energy Standard requiring 50 percent of all power to be supplied by renewable energy sources by 2030, while lawmakers in Massachusetts are mandating a specific portion of energy supply to come from offshore wind generation and hydro power.

Peak Response: A Strategy for Managing Energy Costs

Energy pricing trends fluctuate from one season to the next. Commercial energy customers can implement a number of strategies to help them manage costs.

One of these programs is peak response, a voluntary program designed to help customers lower their capacity and transmission charges by reducing their usage during peak hours. Peak load hours are when demand for electricity reaches its highest levels of the year. The amount of electricity customers consume during these peak times are what determines their individual capacity and impacts what they are charged for transmission during the following year.

By using less electricity on these days, they can reduce their capacity costs in the coming year.

Constellation’s market experts monitor the grid 24 hours a day, seven days a week, and predict what these peak hours will be. They notify customers by email when these peaks are expected to occur, and customers can opt to reduce their usage on these days. So far this summer, Constellation has correctly predicted the highest year-to-date peak load days in the NYISO, ISONE, PJM and ERCOT markets.

To learn more about peak response and other strategies for managing energy costs in the coming year, contact your Constellation representative or request a consultation today.