With summer fast approaching, it’s prudent to examine the factors that determine the price of electricity and natural gas supply throughout the United States. Summer is typically a “demand” season – a season where the energy needs of the country necessitate that we expend energy sources, such as natural gas, rather than expand them. Naturally, that demand primarily corresponds to the intensity of summer weather we experience.
As we explained in a previous article, late afternoons in mid-summer typically make up the grid’s “peak demand” days. Those peak demand days affect a business’s capacity tags, and how that can lead to reduced or increased expenses going forward. In this article, we will discuss the factors that are likely to impact energy procurement this summer, both supply and demand. We will also discuss energy procurement strategies, and how APPI Energy works to provide our clients with solutions that reduce upward pricing risk during these summer months.
Demand
As mentioned previously, the weather is a primary driver of energy demand, and is chiefly responsible for summer’s status as a peak demand season. This summer, NOAA predicts above average temperatures across much of the country, primarily in the Southwestern United States, and pockets of the Northeast. However, many factors could skew temperatures away from their currently projected ranges. High latitude cloud cover and expanding drought in the Southern Plains may pressure temperatures upward throughout the southern and central United States, whereas a developed El Nino and continued rainfall (as we’ve been experiencing in the Eastern United States throughout May) may lead to a cooler (and thus less demand intensive) season. However, as of this article’s publication, estimates are that we’ll have a hot summer, beginning early into the season.
While weather plays the most fundamental role in energy demand, it is far from the sole contributor. As of this week, U.S. exports of crude oil hit a record high, at 2.6 million barrels per day. The U.S. continues to bolster its exports, in the fields of crude oil and natural gas. As global demand for energy increases, as it is projected to do, the U.S. will likely continue to increase its exports and build infrastructure to support these increases.
Factors that drive energy demand typically create an upward pressure on prices. If summer proves hot, it is likely that we will see energy prices increase accordingly.
Supply
A hot summer, driving demand, may have a negative impact on certain areas of the country. Southern California and Texas have expressed concerns about their ability to meet demand this summer, should we experience (as is predicted) above-average temperatures. In Southern California, lower-than-average hydropower generation, combined with our unusually low natural gas supplies (the result of a cold spring, which has brought natural gas stocks 24.6% lower than the five-year average) may create challenges for grid operators in the area. California plans to utilize demand response incentives and consumer conservation initiatives to combat the threat of blackouts.
In Texas, it’s a similar story. In recent months, the Lone Star state saw the retirement of several large coal-fired plants, and one large gas-fired resource. These retirements have resulted in the loss of 4,334 megawatts of generating capacity. Additionally, three gas-fired resources, planned to come online before or during the summer of 2018, have been delayed beyond the season, depriving the grid of 1,193 MW of generating capacity. ERCOT expects that it will have sufficient operational tools to maintain reliability, but it is expected that prices in Texas will peak, in the event of a hot summer.
Despite everything, natural gas production remains very strong. Oil prices have been driving up drilling activity, with 132 rigs added to total rig count, year-over-year. Total U.S. crude oil production, as of this article’s composition, was 15.9% higher than it was the same week a year ago. This is important, because increased oil production leads to higher natural gas production. This is because most wells in the U.S. produce both oil and natural gas. When oil prices are higher, it encourages the development of new oil rigs, which in turn contributes to stronger natural gas production.
When examining energy procurement strategies during the summer months, we typically find that it is best to start early, especially if there’s a contract expiring in July or August, when demand could be at its highest. By examining pricing in May or June, even for a contract that expires months (or even a year) in the future, it maximizes the time that we have to monitor the market and identify an ideal price point. Waiting until a contract expires to examine renewal pricing could subject a business to the upward pricing pressures present during the peak demand season.
Additionally, we have a number of services available in the APPI Energy Intelligence Suite that are designed to help businesses utilize data-driven solutions to reduce and manage energy expenses. Services such as demand response, renewable energy procurement, and utility management systems are ideal for businesses that seek efficient solutions to summer’s peak demand conditions.
For more information about how APPI Energy can help your business prepare for the summer season, please contact us online or via our phone number, 800-520-6685.