Electricity Price Outlook Wholesale Electricity Futures Prices as of July 14, 2011 By John Howley Office of Technical and

Regulatory Analysis The Office of Technical and Regulatory Analysis presents the outlook for wholesale electricity prices each month. This assessment considers trends in futures markets, forecasted weather, economic growth and input fuel prices. Wholesale Electricity Futures Market Contracts to deliver electricity in future months are traded for the multi-state region (including the District of Columbia) served by PJM Interconnection. The chart below shows the futures contract price strips through February 2013 as settled on May 17, June 20, and July 14. Because electricity cannot be easily stored, the effect of seasonal temperature changes on futures prices stands out sharply, with a yearly peak in the hot summer months and a lower peak during the coldest. The overall level of wholesale electricity futures prices reflects investor expectations about the price of natural gas. In the PJM wholesale market, gas-fired generation is typically the last unit called upon to supply load. Rising domestic gas supplies have brought prices down from historic highs of a few years ago. 1

Wholesale Electricity Futures Prices ($/MWh)

$75 $70 $65 $60 $55 $50 $45
Jul-11 Jan-12 Jun-12 Jul-12 Feb-12 Jan-13 Dec-11 Nov-11 Nov-12 Sep-11 Aug-11 Aug-12 Sep-12 May-12 Dec-12 Feb-13 Oct-11 Mar-12 Apr-12 Oct-12

5/17/2011 6/20/2011 7/14/2011

PJM Western Hub Peak Calendar-Month Real-Time LMP Swap

1

Source: CME

The Energy Information Administration (EIA) recently doubled its estimate of the technically recoverable domestic shale gas reserves. For a discussion of uncertainty over production forecasts, see EIAs Annual Energy Outlook 2011, http://www.eia.doe.gov/forecasts/aeo/IF_all.cfm#prospectshale.

The July 14 price strip shows the effects of unexpectedly hot weather. The higher prices for July and August reflect the shift of the three-to-six month weather forecast towards above-average temperatures (see below). The Energy Information Administrations (EIA) Short-Term Energy Outlook (STEO) projects a rise of 2.9 percent in residential electricity prices nationwide during 2011, compared to a 0.6 percent increase in 2010. 2 EIAs Regional Short-Term Energy Model projects residential electricity prices to rise by 3.8 percent in 2011 in the South Atlantic region (which includes the District of Columbia). 3 Most of the other states in the EIAs South Atlantic region remain dominated by vertically integrated utilities that are less sensitive to changing market forces. PEPCO has filed its new Standard Offer Service generation rate with the District of Columbia Public Service Commission. 4 On June 1, 2011, the average monthly bill for residential customers on Standard Offer Service declined by 10.2 percent. The following sections provide a brief discussion of some of the factors affecting this outlook, including the weather, the economy, and fuel prices. Weather Forecast La Nia/El Nio conditions in the tropical Pacific Ocean are the primary factor in the three-month temperature outlook. Sea-surface temperatures in the equatorial Pacific Ocean influence weather patterns across North America. Last winters La Nia has ended and has entered a neutral state indicating higher than normal summertime temperatures for the South Atlantic region. The long-term warming trend continues. 5 EIA is predicting that, for the South Atlantic region, the number of cooling-degree days in 2011 will be 10.3 percent above the 30-year average (rather than slightly below average as reported in the April 2011 STEO). EIA predictions are based on forecasts by the NOAA Climate Prediction Center. 6 Economic Growth and Electricity Consumption The outlook for economic activity in 2011 remains positive. Real gross domestic product (GDP) is expected to continue increasing but not by enough to bring down the stubbornly high unemployment rate. In this months STEO, the EIA is projecting a GDP growth rate of 2.5 percent for 2011, which is below the 2010 growth rate of 2.9 percent. 7 Dramatic volatility in crude oil prices are a key part of the dimming economic outlook. EIA expects nationwide power consumption to be flat in 2011. With this summers cooling-degree days rising towards last summers levels, electricity sales to the residential sector
2 3

See chart entitled U.S. Residential Electricity Price, STEO released July 12, 2011; http://www.eia.doe.gov/steo/. See Table 7c, STEO released July 12, 2011; http://www.eia.doe.gov/steo/. 4 Retail Rates for Standard Offer Service filed February 22, 2011, in Formal Case 1017. 5 http://www.cpc.ncep.noaa.gov/products/predictions/90day/fxus05.html. 6 See Table 9c, STEO; released July 12, 2011; http://www.eia.doe.gov/steo/ 7 See Table 1, STEO; released July 12, 2011; http://www.eia.doe.gov/steo/.

will be about the same as well. At the same time, sales to the commercial and industrial sectors are stagnating as economic growth slows, leaving overall sales flat. 8 Fuel Prices The cost of fuels for electricity generation are projected to be flat or declining, with the exception of petroleum-based fuels. The moderate trend of electricity prices is driven by stable or declining natural gas prices and slow economic growth. Petroleum The International Energy Agency (IEA) announced on June 23 that member countries would release up to 60 million barrels of crude petroleum from strategic reserves. Crude oil prices initially declined in response but have since returned to pre-announcement levels. The crude oil market is powered by strong global demand and political instability in oil-exporting countries. The EIA reports the following conclusion: Although the IEA release will provide some additional supply, EIA expects oil markets to tighten through 2012. Given projected world oil demand growth and slowing growth in supply from countries that are not members of OPEC, the projected U.S. average refiner acquisition cost of crude oil rises from $102 per barrel in 2011 to $108 per barrel in 2012, about $1 per barrel below last months Outlook. 9 Petroleum fuels make up less than one percent of the PJM fuel mix. 10 Natural Gas Increased domestic reserves and production will keep natural gas prices moderate for this year: EIA expects that the Henry Hub price will average $4.26 per MMBtu over the second half of 2011, as the inventory deficit relative to last year narrows. EIA projects that the Henry Hub price will average $4.54 per MMBtu in 2012, as slowing growth in production contributes to tighter domestic natural gas markets. 11 Both the level and the volatility of natural gas prices have declined significantly since 2008. Natural gas accounted for 11.4 percent of the annual PJM fuel mix in 2010, an increase over 2009.

8 9

See page 7 and Table 7a; STEO; released July 12, 2011; http://www.eia.doe.gov/steo/. See page 1, STEO; released July 12, 2011; http://www.eia.doe.gov/steo/. 10 https://gats.pjm-eis.com/myModule/rpt/myrpt.asp?r=227&TabName=System%20Mix%20By%20Fuel. 11 See page 7, STEO; released July 12, 2011; http://www.eia.doe.gov/steo/. Henry Hub, located in Erath, Louisiana, is the pricing point for natural gas futures contracts traded on the New York Mercantile Exchange (NYMEX)

Coal EIA reports prices for coal delivered under long-term contracts to the power sector. 12 EIA expects the delivered coal price to remain flat in 2011 due in part to increased competition with natural gas. Coal represented fifty percent of the PJM fuel mix in 2010.

Date 10Q1 10Q2 10Q3 10Q4 11Q1 11Q2* 11Q3* 11Q4* 12Q1* 12Q2* 12Q3* 12Q4*

Electric Power Sector Fuel Prices $/MMBtu Residual Distillate Natural Coal Fuel Oil Fuel Oil Gas 2.26 12.10 15.84 6.06 2.26 12.36 16.48 4.89 2.28 12.36 16.18 4.88 2.25 14.19 17.94 4.69 2.35 15.88 20.99 5.05 2.36 18.18 23.49 4.93 2.32 18.11 23.17 4.96 2.27 18.24 23.39 5.21 2.35 18.52 23.24 5.48 2.33 18.75 23.33 5.07 2.31 18.82 23.63 5.30 2.27 18.92 24.04 5.65

*Estimates and forecasts for 2011 and 2012. Source: EIA, Short-term Energy Outlook, July 2011.

The reported price for coal is an average of contracts negotiated over recent years and is less volatile than the spot prices reported for other fossil fuels.

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Electric Power Sector Fuel Prices

($/mmBtu)

$26 $24 $22 $20 $18 $16 $14 $12 $10 $8 $6 $4 $2 $0

10Q1

*Estimates for 2011 and 2012

10Q3

11Q1
Coal Natural Gas

11Q3*

12Q1*
Residual Fuel Oil Distillate Fuel Oil

12Q3*

Source: EIA, Short-term Energy Outlook, July 2011

Electric Power Sector Fuel Prices

(Percent Change, Year Ago) 60% 50% 40% 30% 20% 10% 0% -10% -20% 11Q1 11Q3*
Coal Natural Gas

*Estimates for 2011 and 2012

12Q1*

12Q3*

Residual Fuel Oil Distillate Fuel Oil

Source: EIA, Short-term Energy Outlook, July 2011

Wholesale Electric Market Assessment Information

Price of Electricity Futures Contracts for July 14, 2011 Twelve Month NYMEX Strip Components 13 $/MWh (for $/kWh, divide by 1000)
20-Jun-11 14-Jul-11 $65.65 $68.90 $65.15 $65.65 $52.10 $53.35 $46.55 $46.90 $46.50 $46.65 $52.00 $52.12 $54.45 $56.30 $54.45 $56.30 $50.00 $51.00 $49.00 $50.00 $49.85 $51.25

Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12

PEPCO DC Zone Locational Marginal Price (Hourly Integrated LMP for hour ending 1500) 14 July 14, 2011: $69.80 The above are energy prices only. Transmission and distribution rates are not included.

Weather Forecast 1. Current for next few days to one week: http://www.cnn.com/Weather/ http://home.accuweather.com/ 2. National Oceanic and Atmospheric Administration, Climate Prediction Center Outlook: http://www.cpc.ncep.noaa.gov/

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http://www.cmegroup.com/trading/energy/electricity/pjm-western-hub-peak-calendar-month-real-timelmp.html. 14 http://ftp.pjm.com/pub/account/lmpgen/lmppost.html.