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2020’s Energy Market Storm – Take Advantage of the Current Power Prices

Ali Karimian, Ph. D.

Lead Data Scientist | [email protected]

Summary
  • The mild winter of 2019-2020, the spread of COVID-19, and an oversupply of oil in markets have had the collective impact of pushing power prices almost 8% lower in Texas (as of early June 2020) and almost 5% lower in the Mid-Atlantic and Midwest.
  • Shutting down domestic oil wells has put pressure on the supply of domestic natural gas, which has pushed natural gas prices higher.
  • Two opposite influencers of power prices in the past two months have been the lower energy demand due to COVID-19, and slightly higher natural gas prices, the fuel that sets the price for the generation of electricity in gas power plants.

State of the Energy Market

It’s hard to overstate just how eventful the past few months have been. Coming off a mild winter which left energy demand sagging, we launched headfirst into another demand-crushing event: the economy-stopping spread of COVID-19. These two events were topped off by event number three in our perfect storm: an oil price war between Russia and Saudi Arabia, which is causing a massive oversupply, exacerbated by lower demand for oil due to the spread of COVID-19.

This figurative storm has folks in Breakerbox’s community rightly concerned. And as they’ve been asking what this means for their energy bills, we wanted to take some space here and provide some signal through the noise and panic – coupled with all the humility a group of energy professionals can have while talking about global health issues.

The main question we’ve been hearing is “is this good or is this bad for my electric bill?” and the answer is “it depends”. More specifically, the answer depends on the duration and strength of the impact of a couple of key factors.

Some Key Facts

1. We have never before seen oil trade at negative prices. This event has led to oil producers shutting down production. This event has caused a decrease in the supply (and increase in the price) of natural gas for a few reasons: first, natural gas is a byproduct of oil production, so less oil produced means less natural gas and second, most U.S. natural gas producers shut down because they cannot be economically sustained by the current price environment (source).

2. Since the beginning of the COVID crisis in the U.S. (late February), commercial electricity consumption is down by almost 15%, and residential electricity consumption is up by almost 5%, on average across the country.

3. The U.S. oil/natural gas industry accounts for ~8% of our GDP and 10 million jobs. (source)

4. The regulatory measures put in place to curb the spread of COVID-19 by the various governing agencies are expected to reduce annual US GDP by 13% and with it, energy demand (for reference, in 2009, the GDP shrank by -2.8%). (source)

5. As illustrated in the charts below, the price of a 12-month power contract for a commercial consumer is 7% lower in Texas compared to prices at the beginning of the year, putting us in the low power price regime. This figure is produced using contract prices (cents/ kwh) for commercial customers in the Breakerbox database. Various colors in the graph correspond to the high price regime, normal price regime and low price regime.

6. Contract prices in the Mid-Atlantic are lower around 5% compared to the beginning of the year. Shown below are prices in Maryland (Baltimore Gas and Electric), leveraging our quotes database.

7. Contract prices in the Midwest are also down around 5% compared to the beginning of the year. Shown below are the contract prices in Columbus, Ohio.

Our interpretations of these facts

1. U.S. oil companies are forced out of business by low prices, then oil supply decreases because those suppliers aren’t producing oil. Additionally, because those suppliers are out of business and therefore no longer paying their employees, that kick starts a BAD positive feedback loop that slows down the economy and decreases oil demand. This has two effects on the price your business pays for electricity:

a. Decreases in demand mean that, if supply stays the same, electricity prices will go down (that’s good for your business)

b. Decreases in the supply of natural gas (since natural gas is a byproduct of oil production), which means that if demand stays the same, prices will increase (that’s not good for your business)

The actual impact on power prices in the future is of course unknown. Our speculation here is based on historical events in the market and the current conditions of the energy (oil, natural gas, and power) markets.

First, we want to clear up a few things.

  • There are at least two sides to every story and energy markets are no exception to that rule.

  • For a number of reasons, changes in prices in energy markets won’t correlate 1:1 with electricity prices on the grid (we’ll be covering these reasons in another blog post so stay tuned).

Assuming that U.S. businesses gradually reopen through the remainder of 2020, and low oil prices persist (due to the massive oversupply in the market that’s already at full storage capacity), the following is our assessment of what will likely happen to electricity contract prices:

Short Term Impact on Prices

In Texas, this means lower power prices in 2020 and through the first half of 2021 compared to 2019. Since the storage problem of oil is not going away any time soon (as most of the oil storage facilities in the country are already full), natural gas prices will most likely go higher if the economy reopens. Thus, reopening businesses will most likely push power prices higher.

There are differences in performance of power markets between Texas and the rest of the U.S., mainly due to the large share of oil and gas production on the load (aggregated consumption) and the economy of the state. We expect reopening businesses will push power prices higher across other states as well.

Long Term Impact

Power prices beyond 2021 would bounce back to where they were at the start of 2020.

What It Means For You

If you want to plan for this scenario, you’d take advantage of current prices by engaging in a longer-term energy contract (2 -3 years). If these issues are quickly resolved then we’re looking at energy prices as only temporarily low and as the economy rebounds, you’ll have locked-in a low price and will have the demand from the economy to support strong revenue for your business. Be sure to engage in a contract with “Full Swing” provisions for anything longer than 6 months. In other words, check the fine print for any contracts that force you to pay fees if you have to use less than expected. Our experts at Breakerbox can help you with this provision.

Please bear in mind that this information does not take unforeseen events such as a catastrophic hurricane destroying the natural gas infrastructure in the South, or a very mild or harsh winter in 2020-2021 into account.

As always, if you need any support interpreting your bills, adjusting your energy usage, or engaging in a new contract, don’t hesitate to reach out.

Stay healthy!

The Breakerbox Team

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