2 min read

Cheap Natural Gas Doesn’t Always Mean Cheap Electricity Rates

January 28, 2020

As you have likely heard, national, and even global, natural gas prices have been falling.  In fact, NYMEX futures prices for the rest of this winter are all trading below $2.00/MMBtu and as shown in Figure 1, the balance of 2020 (Feb – Dec) is trading at $2.10/MMBtu.   These are the lowest prices we have seen since late winter/early spring of 2016.  Prices in the calendar year 2021 haven’t decreased as much, but are trading at all-time lows of $2.35/MMBtu.

ERCOT image 1-1Figure 1: Trading History for NYMEX Henry Hub, by 5

Traditionally, these very inexpensive natural gas prices would also drive down electricity prices in Texas, similar to what was observed in 2016 and 2017.  However, this time history is not repeating itself.  The main difference between 2016 and 2020 is the state of the Texas electric grid.

After the power price spikes of this past August, caused by the low Reserve Margin, the market is no longer as concerned with low fuel prices.  Today, the market’s broader concern is having enough generating capacity to meet peak summer-time demand.  As shown in Figure 2, this has caused forward power prices for this summer (Jun – Sep) to remain elevated, almost identical to where they were this past September.

ERCOT image 2-1Figure 2: Trading History for ERCOT North , by 5

Figure 3 shows how wholesale natural gas prices have begun to separate from retail electricity prices in Texas.  Lower natural gas prices are decreasing wholesale electricity prices only in the non-summer months, where the state has enough excess generating capacity to meet peak demand.  Most of the electricity in Texas is used in the summer. 

Even though power prices might be depressed in the non-summer months, the uncertainty around enough electricity being available this summer (and beyond) is keeping retail power prices elevated and not following the overall downward trend of gas prices.

ERCOT image 3Figure 3: Texas Retail Power & Natural Gas Prices (Feb '20 - '21), by 5

Topics: Markets ERCOT

Written by 5

Founded in 2011, 5 comprises a team of energy innovators, commodity traders, analysts, engineers, and former energy supplier executives. Together, they serve a broad array of private and public sector clients throughout the United States and Mexico, providing strategic advice on energy-related matters including procurement, demand-side management, rate optimization, regulatory intervention, benchmarking, bill auditing, RFP management, sustainability planning services, renewable power, and distributed generation. With an eye on growth, 5 has initiated a number of strategic partnerships and acquisitions, including the 2019 acquisition of Luthin Associates. 5 has been named to the Inc. 5000 list of fastest-growing companies in the U.S. for five consecutive years. The firm has also received numerous accolades and national awards for its corporate culture, leadership and innovation, including 5 consecutive years as a top 10 Best Company to Work for in Texas according to Texas Monthly Magazine.