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FERC: Gas Trends to Drive Electric Prices Higher This Summer

The reliability of the bulk power system for this summer should be adequate, though wholesale electric prices -- influenced more by natural gas than anything else -- are likely to continue to rise, according to Charles Whitmore of FERC's Office of Enforcement.

In a Summer Market and Reliability Assessment presented to the Federal Energy Regulatory Commission (FERC) on Thursday, Whitmore said gas infrastructure supports growing electric markets.

"In the fastest growing regions -- Florida and Arizona, for example -- the continuing robustness of the natural gas infrastructire plays a crucial role in meeting growing electric power demand," Whitmore said.

Florida, the fastest-growing energy market in the Southeast region, depends heavily on natural gas for both existing and new power generation. Reporting of market prices for gas is "sporadic" for peninsular Florida and power prices are even less transparent, Whitmore said. In Arizona electric power demand is rising quickly - last year the state consumed 113 TWh, an increase of 11% since 2005 -- and that means rapidly increasing use of natural gas.

The most important aspect of electric power markets this summer is that wholesale prices "are likely to be quite a bit higher than last year," due in large part to higher prices for natural gas.

"Thus, the largest increases appear in the Northeast, where gas is almost always on the margin. The lowest appear in the Midwest, where coal is more often on the margin," Whitmore said.

Gas prices are on the rise, despite rising production numbers, because of lower-than-expected storage numbers (see related story), rising demand, the likelihood that Canadian imports and imports of liquefied natural gas (LNG) will fall and an apparent global commodities boom in most raw materials, Whitmore said.

According to the assessment, overall non coincident peak demand this summer, assuming normal weather and 50% load forecast probability, is forecasted to be 867,525 MW, 1.3% higher than the actual demands of last summer with some regions showing an increase in demand while others a reduction. While the capacity margins to supply the increased demand are forecasted to be sufficient, there are concerns for supply reliability due to deliverability of reserves. In particular, these concerns manifest themselves in Southern California due to constraints on imports from the north and outside California, and in the Southeast should the drought conditions persist, coupled with any major transmission and/or generation outages.

Peak demand is expected to increase in all regions except the Southeastern Electric Reliability Council (SERC), which is projecting a demand reduction of 2.8%.

"This bears scrutiny, as past forecasts for the SERC region have been consistently lower than actual demands for the last few years, when all-time peaks have been repeatedly set," according to David Andrejcak of FERC's Office of Electric Reliability.

The biggest influence on the summer market could be the weather conditions. "We say in 2005 what badly placed hurricanes could do to energy prices," Whitmore said. "Indeed, one of the forces that may be keeping gas prices relatively high is the fear of hurricanes." Hurricane Center meteorologists said last week that the East Coast will be at greater risk this coming hurricane season even though the number of named storms is expected to be about average, and Gulf of Mexico interests can expect seven to 10 days with at least the threat of weather disruptions (see related story). Last month WSI Corp., which already forecast an active 2008 Atlantic hurricane season, upped the ante slightly in an update of its tropical forecast, calling for 14 named storms and eight hurricanes, including four intense hurricanes (Category 3 or greater) to form between June 1 and Nov. 30 (see NGI, April 28). MDA EarthSat forecasters also said the 2008 Atlantic hurricane season will likely be busier than average but quieter than last year (see NGI, April 21). Weather forecasters at Colorado State University (CSU) recently said the U.S. Atlantic basin will likely experience a well above-average hurricane season this year and odds are nearly even that a major hurricane will make landfall on the Gulf Coast (see NGI, April 14).

Scientists at the National Oceanic and Atmospheric Administration (NOAA) have bucked the trend, saying warmer ocean waters could mean fewer Atlantic hurricanes striking the United States this year (see NGI, Jan. 28).

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