Do Power Prices follow Natural Gas Prices?
Despite retaining a reputation for price swings, recent experience indicates that natural gas can perform as a strong low-cost resource in power supply portfolios. Since August, Chris Kopel, Chief Operating Officer, and Kyle Haemig, Resource Planner and Economist, have met with utility commissions participating in the CMPAS Power Supply Coalition to share information about a power contract that takes advantage of the current natural gas buyer's market.
To bring understanding to the situation, Kyle Haemig breaks down the analysis of natural gas prices in terms of long, medium, and short-term forecasts.
"For several years, power prices have followed natural gas prices," said Haemig. "CMPAS's long-term general outlook has been for an increase in natural gas prices and an increase in power prices. While we do not foresee a significant drop in supply, we think it's possible that there will be a higher demand for gas. Increased demand for natural gas, potential pipeline constraints, and growing U.S. export volumes could provide upward pressure on prices.
"In the medium-term, barring the extreme effects of the Polar Vortex of 2014, gas prices have risen moderately from their low in the spring of 2012. Although prices increased from 2016 to 2017, many forecasters believe it's likely that prices will drop or hold firm starting in 2018, and the medium-term forward price curve shows overall stability. This drop in volatility makes fixed-price power contracts cheaper.
"Short-term prices depend on meeting heating and cooling needs as well as other short-term variances. Given the short, medium, and long-term forecasts, we believe that the time is right to meet a share of our future energy needs using simple and stable power contracts," he concluded.
Business intelligence from the October 2017 NextEra ENERGYinsight newsletter confirms the pricing analysis recently conducted at CMPAS and offered the following insights:
- Energy markets across much of the U.S. have appeared quite calm in recent years, as gas and power prices continue their seemingly unending race downward.
- History reminds market watchers that, even when energy prices are on a declining trend, energy markets remain volatile â€“ which motivates consumers to shield their risk by locking in prices.
- Unexpected events ranging from severe weather, changes to weather forecasts, supply outages, and demand spikes can move energy prices.
- Price spikes for natural gas and gasoline provide recent examples of persistent volatility that feeds through to power prices.
CMPAS combines its analysis and intelligence to tailor each utilityâ€™s power portfolio plan according to each utilityâ€™s unique load factor, power contracts, and locally-owned resources. CMPAS believes planning is the most important service it provides utilities. Strategic wholesale market planning conducted by CMPAS produces savings for CMMPA members and helps to position the Agency in the lowest quartile of power agency costs in the five-state region.
If you have further questions about the state of the gas market or are interested in exploring how to best purchase stable, price-competitive power, please contact us.