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Hot Summer Not Boosting Power Prices, Says Moody’s

A hotter than normal summer hasn’t led to a corresponding increase in power prices, with cheap and abundant natural gas putting downward pressure on the electric market, according to a report published Monday by Moody’s Investors Service.

Hot temperatures have boosted electricity demand across the country this summer, with the number of cooling degree days through mid-August exceeding the norm by as much as 40-50% in some regions. But a natural gas supply glut exiting the unusually warm 2015-2016 winter has kept prices in check thus far in 2016, the ratings agency said.

“While the cooling demand index is above average, reflecting higher demand requirements, the primary driver of this year’s power price performance is the impact that the mild 2015-2016 winter has had on already low natural gas prices,” Moody’s said.

Plump inventories at or above the five-year maximum range in 2016 have depressed prices, the agency said.

Storage inventories “are a major reason natural gas prices and power prices have stayed low into the summer, even as the heat drives up electricity demand. Other contributors likely include low long-term demand growth, excess power supply, increased energy efficiency and the growth of renewable power.”

Gas-fired plants generally have less margin risk compared to coal, nuclear and renewables, as their “fuel costs generally move up and down with power prices, since natural gas-fired plants typically set the market price in the major power markets," Moody’s said.

Still, with the exception of a handful of plants in New York and the Midwest, power prices and margins for gas-fired plants are expected to decline year/year, a development that is generally credit negative for many plant operators in regions like Texas, New England, the Mid-Atlantic and California, Moody’s said.

But “higher forward power and natural gas prices starting in 2017 suggest some relief for merchant power generators, subject to a cold winter 2016-2017,” the agency said.

“We suspect that market expectations of a return to a cold winter season is a big driver of higher 2017 forward power and natural gas prices, especially in markets where natural gas is consumed during the heating season.” With the Energy Information Administration expecting storage at the end of October to “be at the highest level on record” for the month, it “emphasizes the importance of a cold upcoming winter in terms of bringing down natural gas inventories.”

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