Power and Natural Gas Markets Explode through Spring 2022
Power and natural gas customers with spot market exposure may see notable increases in energy costs this fall and coming winter. The customers most at risk are those currently contracted for index-only or nominally hedged block-and-index products. In these types of contracts, all or most energy usage is billed at the settlement market price.
Significant increases in liquified natural gas (LNG) exports in response to natural gas shortages overseas, supply chain distributions, and widespread inflation are responsible for price increases in both the natural gas and electric markets. Henry Hub natural gas futures for the first quarter of 2022 (“Q1 2022”) settled at an average price of $5.313 per million British Thermal Units (MMBtu) on October 19, 2021.
The current Q1 2022 Around-the-Clock (ATC) forward electric price for the AEP-Dayton (AD) Hub is 6.607¢ per kilowatt hour (kWh). This is 101% higher than the October 20, 2020 price for Q1 2022.
The graph below provided by Direct Energy Business shows the Q1 2022 ATC forward prices for the AD Hub as traded between October 20, 2020 and October 20, 2021. Prices for November and December 2021 are also trading at outsized premiums. In addition, spot prices have been quite high.
Figure 1: Q1 2022 ATC Forward Prices for the AD Hub
*ATC pricing as of October 20, 2021.
Brakey Energy has reached out to clients with spot power market exposure to discuss the outsized risks this coming winter, along with some innovative strategies to manage those risks. If you are not yet a Brakey Energy client but would like to discuss ways you can potentially manage price exposure, please contact Matt Brakey.
Duke Files Application to Increase Electric Distribution Rates
Electric customers served by Duke Energy (“Duke”) will see increases in electric distribution costs pending Public Utilities Commission of Ohio approval of Duke’s recent “Application…for an Increase in Electric Distribution Rates” filing. In the application, Duke cites its need “to generate sufficient revenue to pay its distribution-related operating expenses” and “provide an adequate rate of return on its property” as justifications for increasing rates. Duke last revised base distribution rates in January 2019.
Duke is proposing to increase distribution revenue by $54.7 million. The company estimates that this increase will result in an approximate 3.3% increase in total electric costs, on average, for its customers.
The table below compares current and proposed base distribution rates for customers served under Duke’s Secondary Distribution Voltage, small (DM) (single-phase and three-phase); Secondary Distribution Voltage (DS) (single-phase and three-phase); Primary Distribution Voltage (DP); and Transmission Voltage (TS) rate schedules. Duke has requested that the proposed rates become effective for the first billing cycle of July 2022.
Table 1: Current and Proposed Base Distribution Rates for Duke Electric Customers
Brakey Energy will continue to monitor Duke’s rate case and will provide updates as warranted. If you are a Duke customer and have questions about how the proposed rates would impact your monthly electric distribution costs, please contact Jennifer Lemley.
The highly competitive generation offers we have been able to highlight for residential customers have disappeared. We are now recommending customers with expiring contracts default to the Standard Service Offer (SSO) until further notice. The SSO is the default price customers pay that are not competitively sourcing power. This rate varies by electric distribution utility but is likely below current market conditions.
Brakey Energy has long and often found defaulting to distribution utilities’ Standard Choice Offer (SCO) a prudent strategy for natural gas supply. We encourage our readers to employ this strategy if they’re comfortable riding the highly volatile natural gas market. While this strategy has performed extremely well for years, customers who are employing this strategy are in store for notably higher winter heating bills.
Natural Gas Market Update
The NYMEX settlement price for October is $5.841 per MMBtu, up 33.7% from September’s price of $4.370 per MMBtu. This settlement price is used to calculate October gas supply costs for customers that contract for a NYMEX-based index gas product.
The graph below shows the year-over-year monthly NYMEX settlement prices for 2018, 2019, 2020, and 2021 to-date. Prices shown are in dollars per MMBtu of natural gas. These are the highest natural gas prices we’ve seen since January 2009.
Figure 2: NYMEX Monthly Natural Gas Settlement Prices
Electricity Market Update
The graph below shows the ATC 12-month price strip for electric generation and how it has changed over the past 36 months for three Ohio utility service territories: American Electric Power (AEP), FirstEnergy (the ATSI zone), and AES-Ohio (formerly Dayton Power & Light (the DAY zone)). Prices have increased dramatically in the last two months in response to soaring natural gas prices.
Figure 3: 12-Month Energy Price Strip
*ATC pricing as of October 20, 2021. Data provided by Direct Energy Business.
The graph below provided by Direct Energy Business shows the October 20, 2019 through October 20, 2021 ATC forward prices for calendar years 2022, 2023, 2024, 2025, and 2026 for the AD hub. Forward calendar year strip prices for all years are at two-year highs. Calendar year 2022 is continuing to trade at an increasingly extreme outsized premium to all other years.
Figure 4: AD Hub Calendar Year Strip Prices
*ATC pricing as of October 20, 2021.
Calendar of Events
26TH ANNUAL OHIO ENERGY SAVINGS & MANAGEMENT CONFERENCE AND VIRTUAL INSTITUTE
The Columbus Renaissance Hotel
50 North Third Street
Columbus, Ohio 43215
Tuesday, February 22, 2021 - Wednesday, February 23, 2021
This is Ohio’s premier conference on energy rates, regulations, and efficiency. Make plans to attend this conference and receive priceless insights into energy prices, trends, savings opportunities, and the forces that influence the price and quality of power in Ohio.
This year’s conference will be a hybrid event. Attendees will have the option to participate in-person at the Columbus Renaissance Hotel or online using the virtual conference platform & mobile app, Whova.
A complete agenda with a list of presentation topics, speakers, and times will be available on the event website by Friday, December 3, 2021.