Commodity Report: U.S. Power Prices Record High in 2003

For the year 2003, record-high wholesale power prices were the defining feature of the U.S. merchant power markets. Generation capacity based in coal, uranium, and hydro benefited greatly from the high power prices, while generation based in oil and gas benefited much less because their fuel costs also rose sharply. Coal prices rose significantly in 2003, but the effect on coal generators was probably minimal because most (85% or more) coal generators have locked up their coal supplies under long-term fixed-price contracts.

Power prices across the U.S. continent generally rose on the order of 50% or more in 2003. The increase is mainly attributable to an increase in gas prices. Eastern regions generally experienced record high or near-record high prices. Prices in the western regions were also the highest on record outside of the 2000-2001 California energy crisis. The Midwest had the biggest jump (82%), while Florida had the smallest increase (17%).

Record High Prices Were Not Limited to On-Peak Power

Off-peak prices also rose about 50% across the U.S. and set record highs along the way in most regions. This pattern runs contrary to the general assumption that off-peak prices and gas prices are only weakly correlated. The Midwest had a whopping 113% jump in off-peak prices, while Texas recorded an 86% jump. Western regions were consistently 60% to 70% higher compared with 2002. Florida was the only exception, where the average off-peak price actually fell 2%.

Market Heat Rates Still in the Dumps

However, the high power prices by no means imply that there is a shortage of generation capacity. In fact, all evidence points to just the opposite. The oversupply of generation capacity in most regions continues to persist and the situation may have worsened over the course of 2003. Market heat rates, a key indicator of supply/demand balance of generation capacity, have consistently dropped in all regions, setting a new low for on-peak market heat rate across the country (see “Market Heat Rate—A Useful Metric For the U.S. Electric Industry”, Utilities & Perspectives, Sept. 11, 2003). A mild summer could explain some of the decline in market heat rates but, since nonsummer month heat rates also declined in 2003, the trend is therefore probably not solely weather-related.

According to the forward market, the decline in market heat rates around the U.S. is expected to continue, but slowing down significantly and certain regions may even see some improvements. Compared with the forward market for 2003, 2004 market heat rates are expected to worsen somewhat for most of the U.S., except for the South and California, which are expected to improve.

Adjustments to Power Price Assumption

Standard & Poor’s has increased its power price assumption for 2004 to incorporate an upward revision of its gas price assumption of last week (see Standard & Poor’s Utilities & Perspectives Jan. 12, 2004). The new natural gas price assumption for 2004 is now $3.75 per million BTU (mmbtu) for 2004, an increase of 50 cents per mmbtu from the existing assumption of $3.25 per mmbtu. Standard & Poor’s gas price assumption and power price assumption for 2005 and beyond will remain the same, except for some minor adjustments to regional basis differentials. (See table for the restated price assumptions for each U.S. region).

Coal Prices

Coal prices experienced a dramatic rise in early 2001, and are currently experiencing another impressive increase. In both cases, the rise in coal prices followed a rise in natural gas prices, but with a several-month lag. At the height of last price spike in the middle of 2001, eastern coal reached $48 per ton and western coal was about $11 per ton. For most of 2002, coal prices stayed mostly below $30 per ton, but increased again in 2003. The rise in coal prices accelerated toward the end of 2003 and is currently trading around $37.50 per ton for eastern coal and $7.00 per ton for western coal. The more dramatic rise in eastern coal prices may be attributable to the declining production and increasing production cost of eastern coal.

Current market prices are above Standard & Poor’s expectation of long-run averages for coal prices, which are $30 per ton for eastern coal and $5.50 per ton for western coal. n

Tobias Hsieh
New York (1) 212-438-2023.

Previous articles are available in the S&P Archive.