It is too simple to say electricity rates are based on traditional “supply and demand” factors. The “supply and demand” factors with electricity pertain to natural gas, the primary component in the generation of electricity. As natural gas prices rise or fall so do electricity rates rise or fall. The major factors in determining natural gas prices are weather and the amount of natural gas in storage, generally in underground caverns throughout the U.S. The amount of gas in storage is provided each week on Thursday morning at 9:30am (Houston time).
Natural gas is added to the amount in storage each year generally beginning around the first week of April and throughout the summer months in order to accumulate a supply of gas to draw upon for the cold winter months. The drawdown of gas from our storage supply generally begins around the first week of November. The maximum storage capacity in the U.S. is believed to be around 4 trillion cubic feet (“tcf”) of gas. The largest amount of gas ever held in storage since records have been kept was in mid-November 2015 with 4.009 tcf, very near the expected total capacity. With a record amount of gas in storage, and with record production of gas due to the new fracking technologies, gas fell to an inflation-adjusted lowest price in the history of the Nymex trading in December 2015, bringing electricity rates down also to new 11 year lows.
As is normal at the beginning of the year, January gas prices and electricity rates went up as natural gas was drawn from our storage supplies during the coldest month of the winter. Gas prices closed January 29th (the last trading day of the month) at $2.298. As the nation began to forecast and actually start to see warmer weather overall, prices for gas dropped to $1.978 on Thursday, February 4th when the storage numbers came out from the government.
The report on Thursday, February 11th, provided an ongoing view that natural gas prices will continue to go lower, which will also take electricity rates lower. The report this past week showed our gas stockpile fell by only 70 billion cubic feet (“bcf”) which was 14 bcf less than the average forecast, and was significantly less than the corresponding week last year and the five-year average. Natural gas closed the week at $1.966, and should continue to drop. How can I be so sure?
As of the February 11th report this year we have 2.864 tcf of natural gas in storage. This is 573 bcf (+25%) more than last year at this point and 543 bcf (+23%) greater than the 5-year average. Assuming nothing abnormal takes place on the weather front this year, and gas production again increases another 1.5%, as predicted, we will most likely be pushing the limits of our gas storage capacity by September or October. What do we do then – give gas away for free?
Expect new record lows in natural gas prices this year accompanied in parallel with record low electricity rates. One cold winter snap, as in 2013, or a sudden change in governmental policies could change this trajectory, but it is highly unlikely at this point.
So, you should look to lock in these record low electricity rates now for your long term savings. When your electricity contract comes up for renewal this year I recommend you consider signing up for the longest rate term your energy broker can find at the lowest cost for that time frame.
Lock in these rates NOW!