Lower gas prices send US Northeast power prices down

By the OGJ Online Staff

HOUSTON, Nov. 6, 2001 — Winter electricity prices in the US Northeast and the West will be lower than last year's prices, reflecting lower natural gas prices, analysts said.

"The power story for the next 3 months is that prices will definitely be lower in 2001, compared to 2000 levels," said Kristin Dall, power practice manager for Energy Security Analysis Inc., Boston.

ESAI's forecast indicates New England Power Pool (Nepool) power prices should average no more than 60% of real-time levels observed last year for the period. Dall said forward markets put a $9/Mw-hr premium on November and December prices. But she expects prices to have fallen by the end of December.

Within PJM Interconnection LLC, Dall said November and December on-peak power prices should average $8/Mw-hr or 20% less than in the same period a year ago.

For the New York Control Area, ESAI forecasts that Zone J-New York City power prices will be 30-40% less than last year, while the marginal cost of power at the New York Power Pool reference bus will be no more than 50-70% of last year's prices.

In the Western System Coordinating Council, Dall said suboptimal hydro conditions could boost power prices above current levels of $30-$40/Mw-hr, but ESAI doesn't foresee a repeat of last winter's volatile western power prices due to lower natural gas prices, additional capacity, and a $91.87/Mw-hr price cap imposed by the Federal Energy Regulatory Commission.

"I can't imagine them getting near the cap," Dall said.

Reduced fuel switching
Last winter, when spot gas prices spiked to double digits and fuel oil prices slumped, power plants with dual gas/heavy fuel oil capacity switched to oil from gas. This year, with gas prices way down, much of that dual-fired power plant gas demand will return to natural gas, ESAI predicted.

ESAI estimated there is about 60,000 Mw of "true" dual-fired capacity in the US, mostly in the Northeast and Florida. ESAI distinguishes "true" dual-fired capacity from plants that use residual fuel capability as simply an emergency backup rather than as a means to optimize fuel costs. About two-thirds of this capacity is still owned by public utilities and one-third by nonutilities, according to ESAI.

Last December and January every gas-fired power plant with oil burning capability had an incentive to switch to oil when spot gas prices topped $10/MMbtu and fuel oil prices averaged $4/MMbtu. This year, ESAI said the price differential is not as compelling for switching. Gas prices are projected to average $4/MMbtu at the gateway to the Northeast (Transco Zone 6), while New York Harbor 1% fuel oil prices are expected to be $3-$3.30/MMbtu during the peak winter months, ESAI indicated.

"We expect that some of the power plant natural gas demand which deserted last winter will return and that with adequate supplies of natural gas this winter, the price of natural gas — particularly in the Northeast — might be mitigated by the prices of low-sulfur fuel oil," says Mary Menino, manager of ESAI's Natural Gas practice.

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