Time to Lock in Electricity Prices This Fall

Spend Matters welcomes this guest post from IHS.

In early 2015, US electricity prices were running more than 50% below January 2014. This drastic easing was driven by plentiful natural gas supplies and also milder weather that persisted until late winter. The discount to 2014 prices has since declined, coincidentally in line with a temporary plateauing of natural gas production. In the coming months, however, average prices are expected to reach an autumn trough of around $32 per megawatt-hour (Mwh) before ratcheting back to above $35/Mwh in December. December 2015 will also see a reversal of the year-on-year (y/y) decline, ending some 5% higher than the same period in 2014.

Natural gas and renewables continue to boost North American electricity generation. For 2015 as a whole, we forecast overall US production to rise by 3% to more than 4 million gigawatt-hours (GWh). Next year will also see production growth coming to 2.5%, levelling off to 2% by 2017. US growth rates will slow down during autumn, with y/y growth reverting to 2–3%.

Meanwhile, our 2016 estimates are seeing strong gains in the early part of the year, especially in January, when we are expecting a 5% increment versus 2015. For most of the rest of 2016 production gains will stay confined to 2–3%. In terms of the sector breakdown, April’s 33% natural gas production share is set to inch upward to 37% by August. The 2016 weight of natural gas will however stay in the 30–35% range as coal use stabilizes and more renewables also come through. Over coming months wind power will decline from the 20,000–25,000-GWh range seen in the first half of 2015 to 15,000–17,000 GWh. It is only in the spring of 2016 that we expect to see renewables taking a near 20% market share.

electricity prices

US electricity prices are only indirectly exposed to Chinese jitters as short-term demand-side electricity price developments are more directly related to US growth. Recent revisions now have second-quarter 2015 US GDP growth at a much higher-than-expected 3.7% versus the 2.3% initial number. The revision also goes a long way to dispelling fears of a slowdown in 2015, likely driven up in no small part by low oil and commodity prices. US GDP growth is, however, expected to clock in at 2.2% in 2015 and then accelerate to 2.8% in 2016.

On the demand side, US industrial production has experienced somewhat of a month-on-month decline in recent quarters, a trend that was stemmed only in June, running virtually flat versus May. July numbers are, however, expected to inch upward by 1.3% y/y and a 0.6% month increment. Despite a negative blip foreseen in August, we are expecting US industrial production to come through stronger over the next 18 months on sustained 0.2–0.3% monthly increments.

With this general recovery in mind, we forecast US electricity demand to rise about 2.5% in 2015 and 2.4% in 2016, figures that are much in line with expected US economic growth during this period. Contrasting Canadian numbers show lower increments of 0.6% in 2015 and a further 0.94% in 2016, reflecting the slower Canadian economy.

Bottom Line

Prices will decline somewhat heading into autumn. Nonetheless, these yearly peak levels are still running at a sizeable discount compared with the same period in 2014. While the y/y discount is forecast to continue in the coming months, it will inch downward toward an 8–15% premium. August is an exception to this, though, with prices appearing likely to have jumped by almost 5% compared with last year. Therefore, better terms may be secured by waiting until September or October before attempting to negotiate.

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