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March 5, 2014

Frigid U.S. weather means highest power prices since '08

NEW YORK — Freezing temperatures gripping the eastern U.S. will result in the highest electricity prices in six years for consumers in Boston, Dallas and San Francisco.

Supplies of natural gas and coal will decline to six-year lows by the end of this month, government data show. The fuels are used to generate 67 percent of the country's electricity. Wholesale power for use from April through June in New England traded at an average of $62.15 a megawatt-hour Tuesday, 26 percent more than a year earlier and the highest for the period since 2008, according to IntercontinentalExchange and broker data compiled by Bloomberg.

The coldest start to a year since 2011 means consumers won't see the normal seasonal drop in power prices. Natural gas is up 32 percent compared with a year ago, adding to costs for home heating and power generation. Maintenance planned for a third of U.S. nuclear reactors in the next three months, the most for the season in at least 14 years, will further boost reliance on fossil fuels.

"The power markets that got hammered in the first quarter, given the low supply environment, aren't going to see much relief in the second quarter," said Eric Bickel, a natural gas analyst at Schneider Electric in Louisville, Ky.

Power at Northern California's NP15 hub and at hubs serving Dallas and Central Texas were also at the highest since 2008, while April to June prices for PJM Interconnection LLC, the 13- state grid stretching from Washington to Chicago, are the highest since 2011.

Wholesale electricity futures covering consumption this spring are already trading at six-year highs in Boston and San Francisco.

"Consumers should anticipate higher energy bills," said Teri Viswanath, the director of commodities strategy at BNP Paribas SA in New York.

California wholesale prices also jumped as a record drought reduced production from hydroelectric plants, which account for 15 percent of the state's power supply.

Nationwide, consumers may pay an average of 12.28 cents per kilowatt hour from March to May, 2.5 percent more than a year earlier, according to U.S. Energy Information Administration data. Prices will be highest in New England.

Surging demand during the cold weather sent gas inventories in the lower 48 states to 1.348 trillion cubic feet on Feb. 21, the least for the time of year since 2004, EIA data show. Supplies may end March at 1.33 trillion, the lowest for the first quarter since 2008, the EIA said in a Feb. 11 report.

Goldman Sachs expects supplies to drop to 1 trillion cubic feet by the end of March, while Citigroup is projecting 898 billion cubic feet. Either would be the lowest level for the end of the first quarter since 2003, according to government data.

Gas futures rose as high as $4.722 per million British thermal units in Wednesday's electronic trading after settling Tuesday at $4.667 on the New York Mercantile Exchange. Prices surged to a five-year intraday high of $6.493 on Feb. 24.

The price of power is mostly based on gas, said Kate Trischitta, the director of trading at Consolidated Edison Inc.'s wholesale energy trading unit in Valhalla, N.Y.

Stockpiles of coal for electricity generators will fall to 147 million short tons (133 million metric tons) by the end of this month, the least for the time of the year since 2008, according to EIA estimates.

A seasonal slackening of electricity consumption in the U.S. spring will give generators some room to "wiggle" between using gas and coal, Bickel said.

Central Appalachian coal, the benchmark U.S. grade, jumped 14 percent since Nov. 1 to $62.63 a ton Tuesday on the Nymex after reaching a two-year high of $63.75 on Feb. 26.

Appalachian coal stands to benefit the most from higher natural gas prices, because it's in the region where the two fuels compete the most, Michael Hsueh, an analyst at Deutsche Bank in London, wrote in a Feb. 28 report.

Power producers will choose to rely on coal-fired units before turning to gas over the next 12 months "unless they run into problems replenishing their already-depleted coal stockpiles," Angie Storozynski, a New York-based utility analyst with Macquarie Capital USA Inc., wrote in a Feb. 25 report.

Storozynski expects gas to average $4.60 per million Btu through the first quarter of 2015, which would be the highest average for April through June since 2008.

As utilities endure with below-normal gas and coal inventories, 32 nuclear reactors are scheduled to go offline through the end of May for maintenance, according to government data compiled by Bloomberg.

Nuclear plants are taken out of service to replace spent fuel rods every 18 to 24 months. Companies typically stagger the shutdowns to avoid idling too much capacity simultaneously.

The effect of lower output on power prices may be exacerbated by the permanent shutdown of four plants in 2013, removing a combined 3,600 megawatts from service. That's enough to power more than 3 million homes.

Maintenance will be most widespread in the east, where 22 plants are scheduled to refuel. Entergy Corp.'s 1,299-megawatt Indian Point 2 reactor near New York City, the largest in the Northeast, was taken offline Feb. 24. The plant can generate enough power to serve about 1 million homes. Tennessee Valley Authority's 1,270-megawatt Watts Bar 1 site, the biggest in the Southeast, is expected to close for refueling this month. The plant is about 55 miles southwest of Knoxville, Tenn.

"We have a heavy nuclear refueling season ahead of us and a lot of that generation is going to be replaced directly with natural gas or coal," said Viswanath of BNP Paribas. "That complicates things because the market is short of those fuels."

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