Dive Brief:
- A mild winter has helped push down natural gas prices that in 2022 reached levels not seen in more than a decade. Electricity prices that factor in the cost of gas are now expected to decline, but not as steeply or as quickly.
- The Henry Hub natural gas spot price will likely average $3.40 per million British thermal units, or MMBtu, this year, down nearly 50% from last year, according to the U.S. Energy Information Agency. The price is down to where it was in November 2020 and has fallen about 30% from EIA’s short-term outlook in January due to “significantly warmer-than-normal weather,” leading to a drop in demand.
- Low prices are expected to prevail. “We expect a mismatch between supply and demand to last a year,” Faisal Hersi, an energy analyst at Edward Jones, said Monday in an interview. “We could see inventories reach all-time highs.”
Dive Insight:
The fall in gas prices follows sharp spikes last year as demand rose with the end of COVID-19 restrictions and global markets were roiled by Russia’s invasion of Ukraine. The wholesale U.S. natural gas spot price at the national benchmark Henry Hub in Louisiana averaged $6.45 per MMBtu last year, according to EIA. It was the highest annual average in real and nominal terms since 2008, based on data from Refinitiv Eikon, EIA said.
The 2022 average Henry Hub real natural gas spot price increased more than 53% from 2021, the fourth-largest year-over-year increase in natural gas prices on record, behind only 2000, 2003 and 2021, EIA said.
That has now reversed. The spot price Feb. 22 was $2.07/MMBtu, down from $9.75 in August. And it’s expected to stay relatively low for the remainder of the year, said Enrique Gonzalez, senior associate in U.S. gas at BloombergNEF.
“We see the natural gas market remaining loose going forward,” he said Monday in an interview. “This sort of adds, not downward pressure, but it does add support for the price to remain at the low end.
In addition to an unusually warm winter, an explosion at a Freeport liquefied natural gas export plant in Texas in June was a factor in larger inventories, Gonzalez said. The plant being offline for months made more than 2 billion cubic feet per day available domestically, he said.
Inventories at the end of January exceeded the five-year average of 2018 through 2022, EIA said. It expects inventories will close the withdrawal season at the end of March at more than 1.8 trillion cubic feet, or 16% more than the five-year average.
Natural gas was the largest source, about 38%, of U.S. electricity generation in 2021, with coal, nuclear and renewables following, according to EIA. It tends to set the marginal price of electricity, which moves in tandem with natural gas, said Mike Doyle, senior equity analyst for utilities at Edward Jones.
High electricity prices — in some cases, double what consumers paid last year — that some feared would be long-lasting are “more of a temporary issue,” he said.
Jim Thomson, vice chair of Deloitte Consulting, said changes in fuel prices can be “reflected fairly quickly” on electricity bills, even on a monthly basis, through fuel adjustment clauses, permissable in most states, that allow utilities to adjust rates without a rate case procedure. But utility fuel costs are typically made up of longer term contracts with providers and spot purchases at current wholesale market prices, he said.
Wholesale market moves will affect each utility’s fuel costs differently, Thomson said.
About 3 million residential customers in New York City who paid $42.34 for 300 kWh in December faced a 24% increase in January with a $52.55 bill, said Con Edison spokesman Allan Drury. That could drop about 5%, to $49.85, in February, though the amount could change, he said.
In at least two New England states, electricity prices will not drop soon. For Connecticut customers of Eversource Energy, supply prices are locked in until July 1. Supply prices approved by state regulators are adjusted Jan. 1 and July 1.
“As for what the July through December supply prices will be, we hope to have a better idea in late June,” Eversource spokesman Mitch Gross said in an email.
The Massachusetts Department of Public Utilities approved reductions in gas supply rates, but electric basic service rates are based on fixed contracts and do not change during the winter.
Low natural gas prices bring down production costs of electricity, benefiting utilities that have locked in lower costs of service, Hersi said. On the other side of the spectrum — an environment with rapidly rising prices — “you’re locked in with the profit that the state government determined for you,” he said.
