Changes in natural gas market dynamics are affecting forward power prices and a relatively small snowpack in the Northwest is influencing both gas and power prices, according to FERC’s Summer 2010 Energy Market and Reliability Assessment, which was released Thursday.

“Natural gas storage levels have never been this high going into the summer. Prices for the winter strip are about $1/MMBtu above current spot prices, providing an incentive to buy gas now, put it into storage and sell it at winter prices,” according to the assessment. “Domestic gas production has recently reached 60 Bcf/d, a level not attained since the early 1970s. These conditions, with increased storage capacity matched with relatively steady overall demand, have led analysts to forecast that inventory levels will reach 4,000 Bcf this year for the first time.”

Competitive gas prices last year increased the use of gas for power generation at the expense of coal, and despite rising gas prices relative to coal during the winter months, gas prices have recently been falling toward coal again, bringing back last year’s competitive situation, the assessment said.

“From some of the things that I’ve seen, we’ve gotten movement toward gas being more baseloaded, particularly in the Southeast,” said Steven Reich of the Federal Energy Regulatory Commission’s Office of Enforcement. “It’s very interesting just how subject this is to market forces.”

The assessment also found that low snowpack in the Northwest is influencing both power and gas prices. Runoff this spring and summer from low snowpack in the Northwest is projected to bring one of the driest years in a half century, reducing the water available for hydro-electric generation and requiring the increased use of other resources, most likely gas-fired power plants, according to David Andrejcak of FERC’s Office of Electric Reliability.

“These Northwest hydro conditions may test western power markets, but new market structures, moderated demand due to the recession and the availability of new gas-fired capacity to meet the generation shortfall should reduce the risk of a general market dysfunction,” Andrejcak said. California’s hydro conditions are closer to normal, but imports from the Northwest are a key element of the state’s supply portfolio, and the reduced availability of hydro generation will likely be felt in the market, he said.

A projected decline in Northwest hydro generation and changes in natural gas market dynamics this summer compared to last summer are having a significant effect on power prices, according to the FERC assessment. Compared to summer forward power prices this time last year, current prices are mixed — July and August forward electricity prices on May 1, 2010, were 38% higher in the Northwest but just 1% higher in PJM than on May 1, 2009.

“Last May coincided with the brief period in the Rockies Express Pipeline’s (REX) life span when its primary delivery points were in the Midwest,” Andrejcak said. “When REX extended its eastern terminus eastward — first to western Ohio in July and then to eastern Ohio in November — the bulk of its deliveries moved eastward, too. This shift moved over 1.5 Bcf/d from midwestern markets to the pipeline’s intended northeastern customers.”

That change, combined with the addition of another 0.5 Bcf/d of production from the Marcellus Shale, has pushed northeastern basis prices down while midwestern basis has risen. In the West, REX increased eastward competition for Rockies supplies, increasing western gas prices relative to the Henry Hub, he said.

While temperatures this summer are expected to be closer to average than they were last year, the North American Electric Reliability Corp.’s (NERC) demand projections are comparable to last summer’s actual demand, according to the FERC assessment.

Actual summer 2009 load was 3.8% less than the forecasted load, due to the economic recession and mild weather in many parts of the country, according to Andrejcak, who said the continuing effects of the downturn are keeping the 2010 forecasted load comparable to the 2009 actual load.

Despite projections of lower-than-normal hydro capacity in the Northwest, total capacity still substantially exceeds the forecast demand, all regions have adequate reserves, and NERC expects that they will be able to provide reliable service throughout the 2010 summer months, he said.

Weather is “always the largest wildcard going into the summer,” according to the FERC report. A more active Atlantic hurricane season is expected by most forecasters (see Daily GPI, May 20) and the National Oceanic and Atmospheric Administration has forecast a warm summer west of the Rockies and in the Southeast, with colder-than-normal temperatures expected in the Midwest.

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