Energy Markets Update
Weekly natural gas inventories
The U.S. Energy Information Administration reported last week that natural gas in storage increased by 71 Bcf. There was an injection for the same week last year of 104 Bcf while the five-year average injection is 82 Bcf. Total U.S. natural gas in storage stood at 2,100 Bcf last week, 15.7% less than last year and 4% lower than the five-year average for this time of year.
Summer energy markets outlook
The 2021 Summer Energy Market and Reliability Assessment, published by the Federal Energy Regulatory Commission (FERC) on May 20th, finds that higher than average projected temperatures in the U.S. may drive up demand for electricity this summer and test the reserves of many grid operators. The assessment finds that while all planning regions should have enough generation to meet reserve margins, the risk exists that extreme conditions like extended drought or unusually high actualized temperatures could exacerbate market conditions and force generation imbalances. The California market appears to be facing the greatest operational risks and need for inter-ISO transfers, due to a confluence of factors including reduced snowpack for hydroelectric resources, drought risk, fire risk, and increased late afternoon load volatility due to variability of solar generation.
Most of the new U.S. generation builds over the past decade have been led by natural gas and renewables. Older coal and nuclear resources are increasingly being taken offline. Despite the shift in resource mix, the assessment projects that the overall share in natural gas generation will decrease from summer 2020 due to an increase in natural gas prices anticipated this summer. Much of that generation will be displaced by coal-fired units. Despite the demand side reduction, total natural gas demand is expected to exceed 2020 levels by 2.6%.
Summer 2021 natural gas prices are expected to rise across the US with Henry Hub futures projected to settle at $2.83/MMBtu for June through September, a 49% increase from 2020 settled prices. Prices are higher across nearly all major hubs compared to 2020 – a year in which historically low prices followed pandemic-induced demand declines and an oversupplied market. With economic recovery in full-swing, demand is now rising, while major supplies have since cut production. Expectations past the summer are less clear, as market factors indicate that natural correction may occur and bring prices down. Production is expected to increase as oil prices recover and natural gas demand burn may be tempered due to fuel switching induced by high prices.
Due to strong correlation between natural gas prices and wholesale electricity prices in the US (due to the high share that is natural gas burn), wholesale electricity for this summer follows the same narrative as natural gas – and in nearly all regions prices is expected to be markedly higher than summer 2020. For customers with previously fixed pricing for both energy types, summer markets will have muted impact of pricing, however for customers with index exposure, year-over-year cost increases should be expected.
National Grid & RWE join forces to develop Northeast offshore wind
On May 20th, National Grid and RWE Renewables, one of the world’s leading renewable energy developers, announced a joint partnership to develop offshore wind projects in opportunistic coastal regions of the Northeast. The increased attraction in development of the offshore wind resource follows the Interior Bureau of Ocean Energy Management (BOEM)’s March announcement to auction nearly 800,000 acres for offshore wind development in the New York Bight, an area that stretches from Long Island, NY to the New Jersey coast. This strip has the generation potential of over 9,800 MW of electricity, enough to power 3.4 million homes. The newfound partnership between National Grid and RWE is integral in achieving New Jersey and New York’s goal of developing 7,500 MW and 9,000 MW of offshore wind by 2035, respectively. The upcoming auction for the remaining lease areas is expected to draw other major renewables players into the market and generate a sufficient amount of resources to meet the state’s nation-leading goal.
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