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Cheap NatGas Reduces 2016 Power Prices, Accounts for More Generation

Low-cost natural gas pushed year/year average wholesale electricity prices down at major trading hubs across the United States in 2016 and encouraged more use by power generators, the Energy Information Administration (EIA) said Wednesday.

Average wholesale electricity prices in 1Q2016 were significantly lower year/year, ranging from 24% lower in California to 64% lower in New England, according to the EIA's latest Today in Energy note. Monthly wholesale prices for most of 2016 were slightly lower than those in 2015, averaging between $20-45/MWh. Natural gas, which typically determines the generation cost in most markets, became for the first time the primary source of U.S. electricity generation for the entire year.

Monthly natural gas-fired generation first exceeded coal-fired generation as the nation's primary source of power in April 2015. Natural gas then became the leading source nearly every month of 2016, accounting for an estimated 34% of total annual utility-scale power generation, compared to a 30% share for coal-fired generation. Coal and gas each accounted for 33% of U.S. power generation in 2015, according to EIA data.

The cost of gas delivered to power generators averaged $2.78/MMBtu during the first 10 months of 2016 -- the latest data available -- which was 17% lower than the average price during the same period in 2015. Milder winter weather in early 2016 also kept prices lower than during the winter of 2014-2015, when wholesale prices in the Northeast peaked in response to cold temperatures and infrastructure constraints that prevented more fuel from getting into the region.

The average wholesale electricity price in ISO New England, which operates the region's grid, was $34/MWh in February 2016, compared to $138/MWh in February 2015. Wholesale power prices have began increasing again, moving up in December with colder winter weather that has pushed natural gas prices up, too.

Most of the nation's power capacity additions over the last 20 years have been gas-fired units, but as prices started heading south in 2009, it further threatened the cost-competitiveness of coal. While the EIA said in November that coal could surpass gas this winter as gas prices delivered to the power sector rise, most of the nation's energy generation going forward is expected to come from gas and renewables, which continue to gain market share.

EIA said electricity generating facilities were scheduled to add about 24 GW of utility-scale capacity in 2016, more than 90% of which were natural gas, solar and wind additions. Coal units continued accounting for the most retirements last year as well, with more than 7 GW of coal-fired capacity retired, or about 2.5% of the nation's existing coal capacity at the end of 2015.

The EIA said last week when it released the Annual Energy Outlook 2017 that it expects gas production to continue increasing in the years ahead, with relatively low and stable prices that support higher levels of domestic consumption, including in the electric power and industrial sectors.

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