Summer heat may push winter power prices to record highs: sources

Summer heat may push winter power prices to record highs: sources

Houston (Platts)--4Aug2005

Above-normal temperatures across much of the US in July and forecasts of
continued heat in August may force power prices this winter to all-time highs,
market sources said Thursday. Forward electricity prices in much of the
country already are at record levels and with little hope of falling natural
gas prices, winter power prices are shaping up to some of the most expensive
ever seen. 

Because of the heat, power generators have been forced to use more natural gas
units than they had originally projected, and that is eating into storage
levels in advance of the heating season. The US Energy Information
Administration Thursday reported a net injection of 37 Bcf for the week ending
July 29, a much lower-than-expected build that raised working gas inventories
nationwide to 2.420 Tcf. The report included a second consecutive net
withdrawal in the producing region. In the same week of 2004, EIA reported an
81-Bcf build and 2.368 Tcf in storage.

The surplus over the year-ago level narrowed to 52 Bcf from 94 Bcf a week ago,
while the surplus over the five-year average shrank to 170 Bcf from 197 Bcf.
The injection report demonstrates the impact electricity generation is having
on natural gas, Kyle Cooper, an analyst with Citigroup Global Markets, said.
"It's clearly the high [power] demand that is pushing [gas] prices higher," he
said. "We're in a weather-driven market." 

In forward trading this week, the New England Winter 2006 package traded as
high as $113/MWh, a record for winter in the region. It had been hovering in
the low triple digits since the middle of June, but saw a dramatic run-up this
week as natural gas prices continue to soar. Before the middle of June, the
last time a Winter package in the Mass Hub traded in triple digits was from
the middle of October to the end of November last year. After that climb,
prices fell back into the mid-$80s/MWh to upper-$70s/MWh. In PJM, Winter 2006
traded at $81.75/MWh, the first time a Winter package in PJM has ever traded
over $80/MWh.

Since the beginning of June, the package has lingered in the low to
mid-$70s/MWh. Before June, the highest a Winter package ever traded in PJM was
at $75.25/MWh in October 2004. While power prices are breaking records, or
getting close to them, this summer, winter prices could be just as bad--if
not worse--if gas prices for January and February stay high. 

In early trading Thursday, January and February natural gas contracts traded
as high as $9.77/MMBtu, the highest prices on the NYMEX natural gas contract
market. And there doesn't appear to be much relief in sight, Cooper said. "No
one is going to sell [their gas] until the winter," he said. "They're going to
wait and see what they can get for it."

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