On April 16, FERC’s Office of Enforcement released its “2008 State of the Markets Report” on natural gas and electric market performance during the previous year. Generally, average electricity and natural gas prices in 2008 were substantially greater than prices in 2007 in almost every region of the United States.
Large Swings in Gas Prices
Average natural gas prices were between 16% and 29% greater in 2008 compared to 2007. Staff said that supply and demand fundamentals alone could not explain “a period of dramatic fluctuation and unprecedented summer prices” for natural gas, when Henry Hub spot prices peaked at more than $13/MMBtu in July. Gas prices then fell to $5.71/MMBtu by the end of 2008.
Staff identified several factors that led to the unprecedented high gas prices. Gas storage was the lowest in 11 years due to a cold January, net gas imports from Canada were down 14 percent during the first half of 2008, and LNG imports were off 64 percent. In addition, the offshore Independence Hub had to shut down repeatedly during April and May, losing up to 900 MMcfd, or about 46 Bcf for the entire period. Then a hot June led to a surge in gas consumption from power generators to meet air conditioning load.
Similarly, a number of issues contributed to lower prices in the second half of 2008. July and August were relatively cool, which helped moderate demand from power generators. Then the financial crisis contributed to decreasing gas demand, particularly for industrial customers in the fourth quarter of 2008. This allowed gas storage levels to recover to above the 5-year average.
Further, trends in unconventional gas production and new infrastructure, which started several years ago, are fundamentally changing the nature of natural gas markets. Although technological advancements have made unconventional gas production more economic, it remains to be seen whether such production can get into balance with consumption in a manner that will not lead to exaggerated boom and bust cycles.
Effect of Financial Market Turmoil on Energy Prices
In the second half of 2008, the financial crisis altered the role of financial products and players in energy markets and increased the cost of capital while simultaneously reducing the access to capital. Financial gas trading far outpaced the physical gas market in 2008. The volume of trading across all U.S. gas products traded on the IntercontinentalExchange (“ICE”) was about 34 times higher than physical gas trading through October 2008. Then, as financial institutions experienced growing distress, trading of financial energy products decreased and energy market participants experienced reduced access to and a higher cost of capital. In the last two months of 2008, the volume of trading across all U.S. gas products traded on ICE fell to 22 times higher than physical gas trading.
Fuel Prices are the Driver for Electricity Prices
Spot electricity prices during 2008 were driven largely by the underlying fuel and commodity prices, and the financial crisis. As natural gas prices started falling in July and coal prices stayed high, natural gas fired generation became competitive with plants that use coal. Because coal fired plants generally have a minimum operating level that is a smaller fraction of their maximum output than combined-cycle gas plants, this has the potential to effect operations. To the extent that combined-cycle plants become baseload plants, the availability of capability to ramp up in the morning and down in the evening may be reduced.
The Staff noted that 8,376 MW of wind capacity was added in 2008, with over half of that total coming from Texas and Iowa, and more than 75 percent coming from just seven states. These alternative energy options, along with energy efficiency and demand response have emerged as key components of electricity markets.
Expansion of Centrally Administered Electric Markets
Staff also highlighted several initiatives to broaden the scope of centrally administered electric markets, including in regions that have depended solely on bilateral trading.
- On January 6, 2009, the Midwest ISO (“MISO”) commenced its new Ancillary Service Market, which optimizes the sale and purchase of regulation service, spinning reserves and supplemental reserves simultaneously with MISO’s energy market.
- On April 1, 2009, the California ISO commenced its new market referred to as the Market Redesign and Technology Upgrade (“MRTU”) market system. Among other features, MRTU offers a day-ahead energy market, locational marginal pricing, a process to co-optimize energy and ancillary services and a unit commitment process to maintain reliability.
- On April 1, 2009, Omaha Public Power District, Nebraska Public Power District and Lincoln Electric System completed their transition to membership in the SPP regional transmission organization.
- On April 23, 2009, Southern Company’s bid-based energy auction began. It includes both a day-ahead energy auction for firm-liquidated damages energy and recallable energy, and an hour-ahead energy auction for nonfirm energy.
FERC Capacity Release Reforms
Finally, Staff described the early results from the Commission’s efforts to enhance release of natural gas transportation service and reassignment of electric transmission service. The Commission released Order No. 712 in August 2008, which carved out exemptions to the natural gas capacity release rules to accommodate the development of asset management agreements. Since then, removal of the price cap for released pipeline capacity has not substantially altered pricing in the capacity release market. Capacity releases above the cap comprised only 8 percent of all releases, and 7 percent of all capacity released.
Since the issuance of Order No. 890, market participants that had reserved electric transmission service have been allowed to reassign that service above the tariff rate. While there had historically been little electric transmission reassignment, the quantity of transmission service being reassigned has increased steadily with assignments occurring across the non-RTO markets.
The report is available at: http://www.ferc.gov/market-oversight/st-mkt-ovr/som-rpt-2008.pdf.