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Winter extremes heating up spring power prices: analysis

By Mark Watson

February 25, 2014 - The bump in natural gas prices caused by this winter's extreme weather appears to have pushed expectations for March, April and May wholesale power prices sharply higher since the first of the year, an analysis of Platts price data shows.

Among ten geographically dispersed hubs across the US, average on-peak forward prices for March, April and May so far this year are between 8.4% and 29.7% higher than the 2013 average on-peak forward prices for those months.

The hubs included in this analysis are Mass Hub, New York Zone J, PJM West and Into Southern in the East, the Electric Reliability Council of Texas North and Indiana hubs in the central region, and the Mid-Columbia, NP15, Palo Verde and SP15 hubs in the West.

In the Eastern Interconnection and Texas, power traders buy and sell a March-April 2014 forward package, while in the West, traders buy and sell either individual months or quarters. After averaging the March and April 2014 on-peak forward (see price table) prices for the West to create comparable numbers,

Analysis continues below...

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March-April package prices across the nation as of Wednesday were between 19.2% and 49.3% higher than they were at the end of 2013.

Averaging the March, April and May on-peak forward prices through Wednesday shows that all except two - PJM West and SP15 - are higher than the average actual day-ahead price assessments for March, April and May 2013 (see price table).

Among the hubs that had higher year-to-date on-peak average forward prices, the excess over the average actual on-peak day-ahead assessments for March-April-May 2013 ranges from 1.3% at the Indiana Hub to 20.4% for the Mass Hub.

For PJM West, the year-to-date March-April-May on-peak average is down 0.4% from the actual day-ahead prices for March-April-May 2013. The year-to-date March-April-May on-peak average for SP15 is down 3.9% from the actual day-ahead prices for March-April-May 2013.

But not all industry observers conclude from the overall trend of higher forward prices this year that actual on-peak day-ahead or real-time power prices will necessarily be broadly higher this spring.

"There is nothing pre-ordained or certain to say that electricity prices will continue to rise, although it may look that way at the moment," said Matthew Cordaro, former Midcontinent Independent System Operator CEO.

Cordaro now serves as a Long Island Power Authority trustee and advisory board member of the New York Affordable Reliability Electric Alliance.

"History tells us sharp increases as we have recently experienced can be followed by downturns," Cordaro continued in an email. "The key issue is for utilities to make sure they will have sufficient power, from diverse sources, regardless of the weather and other demand factors."

In addition to weather, the state of the natural gas market, economic activity and the declining use of coal-fired generation are likely to affect power prices this spring, Cordaro said.

Les Deman, a San Francisco-based energy market consultant, said, "Today's forwards encompass the market's assessments of weather and gas prices."

Next page: Contradictions between forecasts and last year's weather influences traders' higher bids

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