U.S. electricity prices in summer will spike due to fuel costs, delivery constraints: EIA

Strong points

Electricity prices are expected to jump 206%

ILB inland barge coal price up 76% to $155.15/st

Henry Hub prices are up an average of 180% year over year

Wholesale electricity prices are expected to increase significantly between 18% and more than 200% year-on-year, mainly due to rising fuel costs, as electricity costs are closely linked to natural gas prices, the US Energy Information Administration said on June 16.

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Although various factors affect wholesale electricity prices, fuel costs are a major factor. Electricity prices are closely linked to the natural gas market, which is often the most expensive generators sent to supply electricity.

“We expect power prices in the Northeast regions (ISO New England, New York ISO and PJM markets) to exceed $100/MWh between June and August 2022, compared to an average of around $50/MWh last summer,” the EIA said. in a June 16. “We expect summer electricity prices to average $98/MWh in the CAISO market in California and $90/MWh in the ERCOT market in Texas.”

New England’s ISO internal center is expected to see the largest year-over-year increase at 206% for average prices from June to August, with Palo Verde in the Southwest the smallest at 18.3 %, according to EIA data.

The prolonged drought in the western United States could also push up electricity prices this summer.

“Although we expect a slight increase in hydroelectric production in California this summer compared to last summer, our forecast for summer hydroelectric production remains relatively low,” according to the EIA. “The limited hydropower contribution this summer will likely lead to California generating more electricity from natural gas and importing power from neighboring states.”

Higher gas prices

The price of natural gas at the Henry Hub averaged $8.14/MMBtu in May 2022, up 180% year-over-year, according to the EIA, which expects the price of natural gas delivered to power generators is averaging $8.81/MMBtu this summer, a 124% jump since last summer.

A boom in natural gas prices this summer is expected to be a major driver of higher wholesale power prices, especially in light of the limited transition from gas to coal in the power sector. U.S. spot gas prices traded broadly in the $7-$9/MMBtu range in May and June, up dramatically from the $2-$4/MMBtu range a year ago. year.

In the New England ISO footprint, Algonquin’s city gate spot gas benchmark averaged $7.86/MMBtu for May and the first half of June, more than triple the average of $2.36/MMBtu from the same time last year, according to S&P Global Commodity Insights price data.

Typically, spot gas prices in New England in the northeast are most dynamic during the winter demand months. However, above-average temperatures have helped propel prices higher in months that have historically seen duller prices.

Decline of coal

In the past, the electricity sector switched from natural gas to coal generation when gas prices soared. However, fewer coal-fired plants have responded in recent months, likely due to continued coal withdrawals, fuel delivery constraints at coal-fired plants, and lower-than-average inventories at coal-fired plants, according to the EIA.

“We expect the share of U.S. generation from coal-fired power plants to increase from 25% last summer to 23% this summer, and the share from natural gas will remain relatively constant at 40%,” the EIA said.

U.S. power sector coal inventories were 29.7% lower than a year earlier in March, at 86.2 million sts, according to EIA data released in June. Falling coal inventories have had a bullish impact on domestic over-the-counter coal prices, especially as producers respond to new demands from export customers amid the Russian-Ukrainian war.

Some global coal end users are interested in the same US coals as domestic utilities. The increase in demand pushed prices up. For example, domestic coal from the Illinois Basin of 11,500 Btu/lb is barged from the Mississippi to the Gulf of Mexico before being transported by ship to markets in Asia and EMEA.

Prior to Russia’s invasion of Ukraine, Platts’ valuation for fast delivery ILB barge coal was $88.15/st. Supported by low inventories and booming global demand, the ILB inland barge coal price rose 76% to the most recent price Platts assessed at $155.15/st.

In addition to increased competition from export markets for the same tight supply of U.S. coal, domestic coal-fired utilities must also contend with slow rail cycle times. Low rail capacity has prevented power plants from receiving long-term contract deliveries, according to a US coal producer. Railway performance issues have prevented utilities from replenishing inventories, and reduced supply has also supported rising domestic coal prices.

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