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Rising Natural Gas Prices Fuel Concerns Of Higher Electric Prices Through Summer

Soaring natural gas prices ahead of the summer cooling season are fueling growing concerns in the electric power industry.

“Natural gas power generation sets the marginal price of wholesale power across the country, which means that as natural gas prices increase, so will the price of electricity,” Paul Cicio, president and CEO of Industrial Energy Consumers of America, said via email. Wholesale power prices have already increased over 200 percent regionally, he noted.

The concern is great enough that the Federal Energy Regulatory Commission (FERC) last month in its 2022 summer assessment warned that expectations of a hotter than average summer could increase electric demand, creating demand for natural gas that is expected to outpace supply growth. Futures prices at major electricity trading hubs are already between 77 percent and 233 percent higher than they were last year, FERC said.

Those factors are already evident in the gas market. The Henry Hub natural gas spot price hit $9.30 per million British thermal units (MMBtu) on May 24, about three times higher than the price a year ago. The cost of purchasing gas in advance is also on the rise. The June 2022 NYMEX contract increased 60.3 cents, from $8.368/MMBtu on May 18 to $8.971/MMBtu on May 24, according to the Energy Information Administration reported (EIA).

For over a decade, prices and emission levels lower than other fossil fuels has made natural gas the leading power generation fuel. Natural gas, at 38 percent, was the leading power generation fuel in 2021, followed by coal with about 22% of the generation market, according to EIA data.

When natural gas prices were low because of a flood of gas from fracking, utilities and their customers benefited from low electricity prices. With gas prices on the rise, customers are beginning to feel the pain. EIA data show across the board increases in electricity prices in all sectors and all regions of the country.

In the PJM Interconnection, the real-time load-weighted average locational marginal price increased 75.5 percent in the first three months of the year compared with the first three months of 2021, to $54.13 per megawatt hour (MWh) from $30.84/MWh, the highest first quarter price since the polar vortex of 2014, according to the State of the Market Report from Monitoring Analytics, the independent monitor for the PJM. Forty-nine percent of the increase was a direct result of higher fuel and emission costs, particularly higher natural gas prices, the report said, noting that generation from coal-fired plants decreased 3.1 percent while generation from natural gas-fired plants increased 6.9 percent from first-quarter 2021 to first-quarter 2022.

The last quarter also marked the highest natural gas and locational marginal prices since 2014 for ISO New England. Total estimated electricity wholesale market costs this winter were $4.28 billion, up 85 percent from $2.32 billion in the winter of 2021, while natural gas prices averaged $14.41/MMBtu this winter, up 147 percent compared with $5.82/MMBtu last winter, according to the ISO’s Winter 2022 Quarterly Markets Report.

Florida, which of all the states is the most dependent on natural gas for power generation, provides another example of how vulnerable utilities can be to rising prices.

“We are on the bleeding edge of price increases,” Jacob Williams, general manager and CEO of Florida Municipal Power Agency (FMPA), said.

“Florida is unique,” said Williams. In addition to its dependence on natural gas, there is zero wind power and only two percent solar power. Solar power is slated to go up to 10 percent in the Sunshine State, but it is not meaningful in terms of reliable capacity because frequent summer rain storms obscure the sun, Williams said.

“In the past, coal provided a natural ceiling on gas prices,” Williams said. Operators could switch between gas plants and coal plants depending on price, but coal prices have also risen dramatically.

Central Appalachian coal has more than doubled over the past year. In addition, coal producers are having trouble meeting demand and stockpiles at power plants have fallen to historically low levels.

Florida also has one of the highest percentages of older residents, many of whom are on fixed incomes. About 30 percent of Floridians spend about 10 percent of their after-tax income on their electric bill, said Williams.

FMPA, which has 31 member cities throughout the state, serves about 12 percent of the state’s 21 million people. About 80 percent of its generation fleet is powered by natural gas, and gas prices have tripled in the last year.

Wholesale power prices are now between $70 per megawatt hour (MWh) and $110/MWh. “We’re looking at a 30 percent year-over-year increase,” Williams said. “It has been a more significant cost increase than anyone had planned on.”

“While not predicting it, I would not be surprised if gas prices were $12/MMBtu,” Williams said. “There does not seem to be a price ceiling until $20/MMBtu or more.”

Upward Pressures on Natural Gas

Natural gas prices began their upward trend early in 2021 when a winter storm in Texas and Oklahoma caused a spike in prices in February. Prices continued to rise through October as economic recovery contributed to growth in gas demand, which outpaced supply, even though gas production in 2021 reached an annual high of 2.97 billion cubic feet per day (Bcf/d), surpassing the previous high of 2.95 Bcf/d set in 2019, according to the EIA.

Cold weather this winter that extended into late spring added to upward pressure on gas prices, which led to below normal injections of gas into storage for the coming heating season as gas already in storage was drawn down to meet winter heating demand. “Injections are just now starting to reach normal,” David Givens, head of natural gas and power services for North America at Argus Media, said.

But that is just one element in a larger picture. Liquefied natural gas (LNG) exports also rose to record levels in 2021. South Korea and China were the top destinations for U.S. exports, but there was also strong demand from Europe, driven by the relatively low price of U.S. natural gas. “Europe will take all the gas we can make,” Givens said.

With European sanctions against Russian energy imports to protest Russia’s invasion of Ukraine, demand for exports is likely to go even higher.

U.S. export capability does have limits, which could act as a temporary limit on LNG-driven price increases, but new LNG facilities are already in the works. A new facility just went online in Louisiana, and “there are many LNG terminals in the works for 2024 and 2025,” Givens said.

Gas production increased last year, but demand has increased even more, Cicio said. If not for LNG exports, “U.S. natural gas prices would be about $3.50/MMBtu.” Because production is not rising fast enough, Cicio estimated that gas prices could rise to over $10/MMBtu, at which point gas would no longer be economic to export, he said.

Givens does not see a ceiling on export driven prices. “Europe and Asia have bought LNG at $30 in the past,” he said.

Even if gas production increases, other constraints are putting upward pressure on prices. Problems building new pipelines put limits on getting gas out of the field and into the market. “In some respects, that is a regional problem,” Cicio said.

There are abundant supplies of shale gas in the Appalachian Basin, but “the entire East Coast from South Carolina to New York is short pipeline capacity,” Cicio said.

Proposed gas pipelines into New York and in New England have consistently met challenges or been struck down. In February, a permit for the Mountain Valley Pipeline project, designed to move gas from northern West Virginia to coastal Virginia, was vacated by a federal court. In July 2020, the Atlantic Coast Pipeline, which would have moved gas from West Virginia to Virginia and North Carolina, was cancelled after years of litigation and cost increases.

Shortly after he took office, President Joe Biden suspended new oil and gas leases on federal lands, most of which are in the West. The moratorium was blocked by a federal judge in June. In April, faced with rising inflation and energy prices, Biden ended the moratorium.

“The refusal to grant new leases is not a major factor in rising gas prices,” said Givens. Instead, he emphasizes near- and medium-term fundamentals such as rising demand for electric power and LNG.

Looking for Relief

The current shape of the forward curve could hold the prospect of some relief for utilities over the next couple of years. For the balance of 2022, the forward curve at Henry Hub is $8.12/MMBtu. For 2023, it is $5.72/MMBtu, and for 2024, it is $4.56/MMBtu.

The big question is whether producers will ramp up production. With the forward curve declining over time – backwardation in industry terms – “it is speculative for them to commit capital for drilling,” Givens said.

After a roughly 10-year tidal wave of shale gas that depressed commodity and stock prices, “producers are finally in the driver’s seat,” Givens said. They “have free cash flow, and they are turning it into dividends and giving it to shareholders. That is their primary goal now.”

On a practical basis, that means during this transition, utilities should have a scenario that plans for gas to be $5 to $10 for the medium term, Givens said.

Faced with the politically untenable prospect of passing on large price increases to customers, utilities are looking for options. In the past, some utilities had been wary of locking in a gas price by hedging either because they became accustomed to low prices or they were burned by locking in prices only to see them drop even further.

Williams says FMPA has already done all “the blocking and tackling” it can do to get prices down. It has taken $30 million a year out of its budget by pre-paying for natural gas to reduce prices, selling excess power from an under used power plant, having its plants operate at high levels of availability, and refinancing bonds.

Now, FMPA and its members are looking at hedging their gas purchases to lock in prices before they rise even further. Some members are acquiring gas for next year, said Williams.

If they can lock in a price of $85/MWh, it isn’t $70/MWh, but “it is a lot less than $110/MWh,” he said.

Williams also favors lobbying Congress and the president to invoke the War Powers Act to expedite the approval of new leases that could potentially increase gas production and ease upward price pressures.

Minnesota public power utility New Ulm Public Utilities has already hedged upwards of 70% of its gas supplies for 2022. One  hedge locked in a price of $2.77/MMBtu for about a third of the utility’s summer natural gas load, “not something we typically do,” Kris Manderfeld, director of the Minnesota public power utility, said.

That hedges only covers the utility’s gas business. On the electric power side, New Ulm has about eight years left in a 20-year, 18-megawatt (MW) contract with Heartland Consumers Power District. The contract covers about 50 percent of New Ulm’s electric load. The utility meets the rest of electric demand with purchases from the Midcontinent ISO. Those prices have been higher than last year, said Manderfeld.

Typically, New Ulm wants its baseload needs covered by contract and uses MISO purchases for load following, Manderfeld said. As always, the utility is urging customers to conserve energy.

“There does not appear to be a cap on gas prices,” Manderfeld said. “People are still paying the price, even though there is nothing out of the normal. Supply is where it needs to be. Our consultants say the thing driving up prices are fear and uncertainty.”

“We will keep trying to do what we can for our customer, to keep the gas and electric prices competitive,” Manderfeld said.