Record low prices in summer 2015 New England wholesale electricity market

Tuesday, November 3, 2015

The summer of 2015 brought New England the lowest wholesale electricity prices since 2003, thanks to record low prices for natural gas.  According to regional grid operator ISO New England Inc., this illustrates what happens "when New England power plants can access the vast supply of lower-priced, domestic natural gas being produced in the Marcellus shale deposit."

ISO-NE, "Summer 2015: The lowest natural gas and power prices since 2003"

In a post on its ISO Newswire site, the grid operator noted that the average real-time wholesale electricity price for June, July, and August 2015 was $26.86 per megawatt-hour (MWh). By comparison, the average real-time price of wholesale electric energy in 2014 was $63.32 per megawatt-hour.  While summer energy prices have typically averaged lower than winter prices in New England, 2015's summer prices were low even in comparison to other recent summers: $34.31 in 2014, or $43.94 in 2013.

What explains New England's low wholesale electricity prices this summer?  According to ISO New England, it's because existing natural gas-fired power plants could get fuel at a low price:
In essence, the reason was the low price of natural gas that could be delivered to the power plants that burn natural gas to make electricity. For most of the year, the price of natural gas is low in New England, and as a consequence, the demand for natural gas for both heating and power generation just continues to grow. In fact, in 2014, New England power generators using natural gas produced 44% of the region’s electricity.
The ISO-NE post describes how low-priced natural gas plus adequate interstate pipeline transportation capacity yields New England low electricity prices.  Indeed, the average price of  natural gas in New England during June, July, and August averaged a record low $2/MMBtu.  This is nearly 40% below last year's summer average ($3.27/MMBtu), itself the next-lowest summer record.

New England's average summer electricity price was even below that of other regions, like the Midwest.  According to ISO-NE, "This summer’s prices indicate that the region’s electricity prices can be competitive, in the more commonly understood sense, with other regions of the US when low-cost fuel is available." Indeed, at times the price of natural gas in New England was below that of the benchmark Henry Hub.

The post also describes how heavy winter demand for natural gas for both heating and power generation, combined with pipeline constraints, yields high natural gas prices and thus high electricity prices.  This has occurred repeatedly in recent winters, such as in January and February 2014 and February 2015.  What is at issue is thus the ability of the interstate natural gas pipeline transportation network to ship enough gas into the Northeast -- a capability exceeded through much of the recent winters, with the resulting price paid in coal and oil emissions as well as dollars.

As ISO-NE notes, most customers' retail rates for electricity are set using mechanisms to reduce rate volatility, and time of use rates are not yet widely adopted.  But the net movement of wholesale markets is eventually priced into retail rates.  Can New England keep competitive with other regions?

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