Western energy markets will face an even tougher summer this year than last, Cambridge Energy Research Associates (CERA) said in a Monthly Briefing issued last week. Gas and power prices will be even higher on average and energy conservation efforts won’t be enough to prevent blackouts, it predicted.
During the third quarter, CERA expects on-peak western power prices to reach their highest levels of the year with monthly averages of between $550 and $620/MWh in August. Off-peak prices are expected to be similar because gas-fired power plants will have to run to support off-peak demand levels.
Meanwhile, spot gas prices at the California border near Topock, AZ, are expected to average $13/MMBtu during May, and this summer prices there should range between $12 and $20/MMBtu depending on working gas storage levels and gas demand.
“California continues to price high above the other North American gas markets as storage injections compete with power generation for scarce regional supplies,” CERA said. “Critically low hydroelectric output and historically low storage inventories within California will keep pipeline flows into the state near maximum levels through the injection season. Until storage inventories improve, prices at Topock are expected to range between $12.00 and $15.00 per MMBtu, with higher spikes possible during the peak summer months.” CERA said compared to last May, there should be a California storage deficit of 40 Bcf by the end of the month.
A number of factors hinge on the low hydro situation in California and the Pacific Northwest. The West will have the lowest hydroelectric supplies available since the 1970s. Hydro availability is expected to be 79% of the average level.
Low hydro availability will “force gas-fired generators to run at their highest levels in recent history to make up for the shortfall,” CERA said, adding that compared with 2000, higher gas-fired utilization rates throughout 2001 and particularly during the summer will “call the West’s least efficient generators into operation for greater periods of the year. This will increase gas demand for power generation, strain power plant operability, aggravate reliability concerns and push up power prices.”
With hydro levels so low, other sources, mainly gas-fired generation, will have to produce an additional 40,000 GWh, or about 4,600 average megawatts to compensate, according to CERA. Gas-fired plants will be pushed to average utilization rates near 85%, “increasing the likelihood of equipment failure and forced outage rates that are higher than last year’s.” Already this spring, CERA said, gas utilization rates are near 60% compared with 48% last year.
CERA forecasts a regional gas demand increase of 0.6 Bcf/d this summer compared to last because of the need to refill below-normal storage levels and to meet strong demand from gas-fired generators that are having to make up for lost hydropower in the region.
In the Pacific Northwest, gas demand in May is expected to be 1.6 Bcf/d compared to 1.4 Bcf/d last May, CERA said. “The need for gas in the Northwest will require the region to compete with California loads for supply, and Malin will continue pricing at wide premiums to Chicago and the Henry Hub. Malin is not likely to spike up beyond $12 early in the summer but should price in the $9 to $12/MMBtu range. Later in the summer, Malin will be more likely to spike up with Topock.”
In the Rocky Mountain region, near-term prices are expected to fall in relation to the Henry Hub because supply has increased by about 200 MMcf/d without an increase in takeaway pipeline capacity, CERA said. Demand in the Rockies is expected to fall to 1.4 Bcf/d in May from 1.7 Bcf/d in April. However, as the summer progresses, the impact of low regional storage levels (which will require incremental supply of 95 MMcf/d), stronger power demand from the Pacific Northwest and emergency pipeline additions (Kern River, 130 MMcf/d) will limit the downward pressure on prices, CERA added.
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