Electricity Prices Impacted By Cold Snap

January 22, 2013

The Bulls were the winners this past week as prices spiked upward. For this seven-day report period the average 12-month price for natural gas on the New York Mercantile Exchange (NYMEX) rose 6.8% and the 12-month average price for peak power on the PJM rose by 2%.

There are two likely reasons for this week's price spike. The first reason is obvious. The second reason is less obvious, but is becoming a larger factor each passing week.

First, of course, is the weather. Weather is the big variable that impacts energy prices. As you may recall, December 2012 ranked as the 10th warmest December on record. So, it is no surprise that the arrival of the colder temperatures is now placing upward pressure on prices.

The second reason behind the price spike may be linked to fuel switching by power plants. More power plants are switching from coal to natural gas. According to Bentek Energy, the estimated daily natural gas used to produce electric power during the first six months of 2012 increased 24% compared to the same period for 2011.

According to the Energy Information Administration (EIA), power plants are using more gas because we are experiencing "a structural shift toward generating more electricity from natural gas-fired plants." The natural gas-fired power plants are getting more use because they are cleaner and more efficient than the older coal-fired plants. As the demand for natural gas increases, so does the upward pressure on natural gas prices.

Stay tuned. The updated weather forecast from the National Oceanic and Atmospheric Administration is now calling for the return of warmer-than-normal temperatures during the last week of January. Warm weather tends to place downward pressure on energy prices.

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