Another summer that went by to fast! Vacations and the long days slow down the pace of everything. Even energy markets seem more calm. With the exception of a couple of volatile days this past summer a CL&P Rate 30 customer could have executed a new 12 month contract within a range of $.003 KWh. Not a lot of movement.
On any given day this past summer the direction of the power market was determined by the latest 12 -14 day weather outlook. The hotter the weather forecast, the higher prices have trended.
Underlying this steady market was the better than expected reduction of the natural gas storage deficit relative to last year and the five year average . At the beginning of the summer the deficit relative to last year was 587 Bcf but as of the week ending September 6th, the deficit had been reduced to 172 Bcf. Relative to the five year average a deficit has been turned around to a small surplus of 46 Bcf. To see how the deficit is being erased see the graphic shown below (Graph B).
By the end of the injection season the EIA projects storage to be just above the 5 Year Average at 3,800 Bcf. The record set last year was 3,926 Bcf. As a result higher prices than last year will be supported throughout the winter.
Overall what the market is telling us is that supply and demand are relatively in balance for now. As the weather outlook changes traders are bidding up prices or selling off volumes. If the market was unambiguously headed higher or lower we would be discussing supply or demand issues (See Graph A below).
Natural Gas Transportation
There have been some developments over the summer that will affect natural gas transportation. The good news is that the Deep Panuke wells off the coast of Nova Scotia came on line in late August. This northern supply will provide gas to the northern end of New England's interstate pipeline system reducing the demand on southern capacity. To the bad, Entergy, the New Orleans based company that runs the Vermont Yankee nuclear power plant, announced that it would be closing the plant during the next year. While there is plenty of generating capacity in New England, the shortfall is likely to made up by natural gas fueled generating plants. As discussed in the sidebar the market had an immediate reaction that hopefully will ease as the timing and implications of the closing of Vermont Yankee are fleshed out.
Overall Outlook and Wildcards:
While the overall outlook calls for steady prices, there are two elements that could cause prices to go higher. The first is the potential for hurricanes to disrupt supply. While there have not been any major storms yet this year, the hurricane season does not end until November 30th so there is plenty of time left before the all clear can be sounded. From Hurricane season the concern then turns to winter weather and the capacity of the interstate pipelines to supply the winter. Should New England have another episode like we did last December when generators could not get natural gas to serve their units, the cost of gas transportation will spike and the spike will be reflected in power and natural gas prices until additional natural gas pipeline capacity is expanded.