“Somebody out there thinks Texans will be paying more for electricity next year.”
This is the first line of an article published last Saturday, April 14, in the Fort Worth Star Telegram. It’s certainly enough to grab the attention of anyone concerned about commercial electricity rates. The article goes on to state,
Since mid-February, the futures price of electricity…in the state’s largest electric grid reversed a yearlong decline and started rising. The trend represents the belief among industry players that by 2013-14, power prices in North Texas and much of the rest of the state will be higher…
We’ve made mention of the natural gas market and its connection to commercial electricity prices several times in recent weeks. We’ve also highlighted the fact that the historically low prices in the natural gas market are yielding favorable commercial electricity rates, but there is no guarantee that the low prices available now will last. In fact, the article from the Star Telegram suggests that today’s low natural gas market is the very thing that will drive prices up in the coming months.
“The goal is to prod generators to add power plants in the deregulated Texas market,” the article explains. Texans use a lot of electricity, and none of us care to relive the brown outs and black outs we’ve experienced in the past during times when the demand for power has risen above our capacity to produce it. “But low wholesale power prices, driven down by the lowest natural gas prices in a decade, are zapping profits for generators.”
The problem is that the statewide demand for power is on the rise but there is no economic incentive to develop new generation at current market rates. As a result, the state’s Public Utility Commission (PUCT) is considering raising the cap on the price of electricity when demand is at its highest. The proposal currently on the table would raise the Power Balance Penalty Cap and System High Cap to $4500 as soon as August 2012 and up to $9000 by 2015. The logic is that this change in regulation could make energy production more attractive, hopefully enticing energy producers to build more plants to meet the state’s rising demand, but it will also necessarily drive the cost of commercial electricity up.
Additionally, this market change could trigger a clause in many commercial electricity contracts that would allow Retail Electricity Providers (REPs) to charge more than the contracted rate due to a “Change in Law”. Concerned parties see this as handing the REPs a blank check because they will be able to effectively charge their customers a higher rate based on their own calculations and interpretation of how the change in law impacts their cost structure that was the basis for contracts written prior to the change. Needless to say the REPs that operate conservatively by hedging the majority of their book would be net losers while those REPs who have failed to strategically hedge could use this as an opportunity to pass on the cost of poor hedges to the consumers.
Bottom line is that as of today we don’t know exactly how this will all play out but we can already see some important fundamental changes in the market. Even though natural gas prices have continued to trend down, heat rates have spiked to such a degree that commercial electricity rates have started to trend up in the face of lower natural gas prices. There is a very important lesson to be learned here. You cannot rely on natural gas prices as the only price discovery tool! Our team has closely analyzed heat rates, wholesale electricity rates and natural gas prices in recent weeks and it does look like we hit the bottom in February. That is the timeframe when the tight directional correlation between natural gas prices and electricity rates apparently ran its course. Spiking heat rates have outpaced the drop in natural gas prices and have effectively established a floor in the electricity market.
So what will it take to bring heat rates back down? There are a couple things; trend reversal in the natural gas market should have some impact, but it may very well require commitment of new generation to slow or reverse the heat rate trend. The right incentives for new generation are where the PUC decisions will be pivotal. The very best we can do is watch market trends, and carefully follow these developments, and more importantly make sure that we fully understand how any change in law will be passed through to consumers in the form of higher commercial electricity rates.
Clearly, there’s a lot to keep in mind when it comes to your commercial electricity decisions. And that is where Live Energy comes into the picture.
At Live Energy, we have the personnel, the experience and the technology to help you make sense of the complex commercial electricity market. Now could very easily be the best time for you to consider shoring up your commercial electricity rates for the next few years. Our job is to help you save money by taking all the factors into account, giving you a clear picture of the best time to act and the best rate to act on. If you’re interested in learning about how we can help you lower your commercial electricity rates, please contact us at (817) 810-7770.
The Texas commercial energy market is constantly changing. Let us equip you to navigate it like a pro.