Gas prices a bigger factor in power hikes
Stronger economy seen in some areas
Pandemic may lessen price surge in 2021
Stronger North American power demand has had a muted effect on wholesale power prices, which have been driven sharply higher by surging natural gas prices, an S&P Global Platts analysis shows, but resurging COVID-19 cases may mitigate power price strength through the end of 2021.
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Register NowAggregate weather-adjusted load hit an eight-year record this July of 526.5 average GW around-the-clock, according to S&P Global Platts Analytics data, but raw average daily peakloads in selected power markets have been up only modestly year-to-date, while wholesale power prices have been significantly stronger, driven by much higher natural gas prices.
"The ... load record is telling, as it aligns with the rapid economic growth that the US has experienced (haltingly) since the beginning of the year," said Campbell Faulkner in an Aug. 27 email. "But the rise in prices is a significantly more complex phenomenon that has crept into the market over the past 20 years.
Faulkner is senior vice president and chief data analyst at OTC Global Holdings, an interdealer commodity broker.
Giuliano Bordignon, a power market analyst at S&P Global Platts Analytics, said the surging weather-adjusted load "appears to reflect a healthy economy in spite of residual COVID restrictions," which he acknowledged have since been tightened.
Natural gas pricing effects
Midcontinent Independent System Operator peakloads have averaged 86.7 GW through late August, up about 3% from the same period of 2020, but day-ahead on-peak locational marginal prices at MISO's Indiana Hub has averaged 67.1% higher, year on year. This peakload data is from MISO itself, and the prices are from the S&P Global Platts price database.
One big factor in significantly higher power prices was the mid-February freeze, which struck most of the middle of the US and caused natural gas prices to spike. Excluding February numbers, Indiana Hub prices were about 43.3% higher, on average, than 2020 averages.
However, Faulkner asserts that gas price strength at least partly has a more long-lasting cause.
"Natural gas has become and even more important part of the dispatch stack (not just peaker) as a large number of nuclear units and older coal units has been retired," Faulkner said. "That has greatly increased the overall sensitivity of electricity prices to natural gas fluctuations. Another factor contributing to the increasing prices of electricity during higher load parts of the year is the continued additions of renewables into the dispatch stack. While renewables offer fantastically low dispatch prices, their intermittent nature means that any higher load times push control districts up into pricier units more quickly."
Therefore, power consumers could face "average higher bills through the end of 2021 (or until a large number of new controllable units are built)," Faulkner said.
Platts Analytics' Bordignon said that while gas prices have almost doubled in the past year, power prices have not increased commensurately because of gas-to-coal switching and an aggregate 13% stronger wind output; however, one of those factors may not persist.
"Tightness in coal markets leading to increasing spot coal prices will challenge switching potential for the remainder of the year, reinforcing the link between power and gas prices," Bordignon said in an Aug. 27 email. "Power prices will therefore remain elevated over the period, although Platts Analytics sees downside risks across the curve in the Eastern markets and [the Electric Reliability Council of Texas]."
Masking pandemic effects
Platts Analytics reports that the heat wave, particularly in the Western Interconnect, contributed to the grid for that segment of North America hitting 96.2 average GW, a new record for any month since at least 2013.
"By contrast, temperatures across the eastern US and ERCOT were low enough to reduce July loads by 4.2% year on year," Platts Analytics said. "The decline in East and ERCOT demand did not prevent weather-adjusted loads from setting a new record for July at the aggregate US level, confirming the health of the economy. But when looking at the year-on-year growth, the 1.8% increase in July continues the decline from the 6.1% seen in May and 4.1% in June."
And the aggregate numbers effectively mask significant regional differences, with New England and New York "lagging in their recovery, while the Midwest and central regions, especially [Southwest Power Pool], are showing firm growth," Platts Analytics said.
Certain areas, such as California and the Southeast, are showing weaker growth, in which climbing COVID-19 cases may be a factor, Platts Analytics said.
The seven-day rolling average of new COVID-19 cases was 153,721 as of Aug. 27, the highest since Jan. 30's 155,458, according to Worldometer.info, which obtains COVID-19 statistics from various public health agencies. The seven-day rolling average for daily deaths on Aug. 27 was 995, the highest since March 30's 1,003.
California has by far the largest number of active cases, almost 2 million, followed by Florida with 822,763. Florida also has the third-largest number of total cases per million population, at 148,872.
"Targeted restrictions should have a limited impact on loads, all else being equal," Bordignon said. "Implementation of more stringent restrictions will have a more pronounced effect on electricity demand, though the imposition of such restrictions remains to be seen."
Another factor that may lessen pricing strength is that the National Weather Service forecasts increased chances -- between 33% and 60% -- for above-normal temperatures for almost all of the Lower 48 states for September through December, which would tend to reduce pressure on natural gas supplies.
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North America set weather-adjusted power load record this July; prices surge - S&P Global
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