“There is no such uncertainty as a sure thing.” – Robert Burns
Many factors continuously affect electricity prices, but the general public is often in the dark about the current market changes. Unlike financial markets, where the effects of changes are experienced immediately, power market conditions do not immediately affect electricity prices. Although utilities are responsive to fluctuating market conditions, the effect on our electricity bills is often delayed as utility companies are restricted to annual rate revisions. The following thoughts are more of a FYI to help shed light on the contributing factors to power market volatility, and to help limit the surprises when the effects are reflected on our electricity bills in the future.
Electricity markets in North America are experiencing more input factors than ever before that are increasing uncertainty. Marketers, who used to be the dominant force in setting price levels, are losing their positions as they are restrained by the constantly increasing number of checks and balances imposed on them by regulators. The technicals are giving way to the fundamental factors – the global economic recession, oversupply of natural gas, and regulatory / political constraints. Americans are on a budget, the European market is near collapsing and growth has slowed in Chinese manufacturing. All of these factors make it increasingly difficult to predict market movements.
Accelerating climate change has driven the need to expand carbon-free energy sources, and many companies are looking to expand their renewable power generation. This movement towards “green” technologies is largely driven by political agenda. Renewable power is heavily subsidized by the government. When these subsidies/tax credits are eventually cut from the budget due to changes in political agenda, we will finally see the answer to the question: “Is sustainable energy really sustainable?” The current renewable power infrastructure does not have the capacity to meet global energy demand, so it is likely that natural gas will serve as a bridge to the next generation of renewable energy. Natural gas is cleaner than oil and coal, allowing it to be a potential ally to the renewable markets. However, this means we will need more gas generation in order to support renewable power.
The expansion in natural gas exploration is a fitting example of uncertainty, as the outlook for natural gas markets has changed dramatically over the past several years, in parallel with the number of factors affecting it. Natural gas prices have been fluctuating significantly over the past 10 years, but are presently at their lowest in North America. In addition, new technological developments have quite literally pushed the industry into new territory. Hydraulic fracturing and horizontal drilling have opened up shale deposits in unconventional reservoirs, and expanded the scale of natural gas drilling. However, given the sufficient supply to serve the local demand, shale expansion is mainly driven by accelerated growth in global demand for LNG. North America is aiming to become a dominant exporter of gas in order to satisfy international demand, particularly in Asia. We see the LNG terminals being transformed from importing into exporting, and their number is growing. The prospect of natural gas becoming a global commodity is becoming more real. In the end, this can cause the US to face a conundrum – while boasting large supplies, the nation will face an increase in local prices driven by the universal economic laws of supply and demand. Will the government interfere to restrict the growth of LNG export terminals in order to curb the potential price increase in local markets?
With the US recession taking longer than expected, electricity demand stays at its low, regulatory authorities keep pushing for increasing controls over trading, and the energy industry is pushing its boundaries more and more to the global plane. Now more than ever, measures need to be put in place to mitigate risk.
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Aiman El-Ramly, Chief Strategy Officer for ZE PowerGroup, will be presenting his own perspective on the Power Markets Outlook at MDA EarthSat Weather’s Spring Energy Conference on March 29 in Chicago.