Over the last decade, the electricity industry has undergone a profound transformation – seen mainly as falling energy prices – due to myriad factors. Increased competition in deregulated energy markets, end-user energy efficiency upgrades, and the accelerating adoption of large scale renewable energy have played a role, but nothing has had a greater impact than plummeting natural gas prices.
The shale boom has turned the US into a net exporter of natural gas and led to rapid adoption of natural gas-powered electric generation, leaving traditional fossil fuel sources in its wake. Contrary to political arguments about a “war on coal” due to overregulation and subsidization of renewable energy sources, the main culprit for coal’s decline is falling natural gas prices. Natural gas is cleaner, more efficient, and cheaper than coal, making the decision to switch away from coal a no-brainer.
Coal isn’t facing significant headwinds alone, though. Low energy prices are affecting all generation types. Entergy cited low energy prices from cheap gas as one of the key factors in shuttering its Indian Point nuclear plant in New York in January 2017. Entergy expects cheap gas will be reality through 2020.
|Net Generation by Energy Source|
|2006||2016 (thru Oct.)||% Change|
Source: US EIA
Gas Prices: Outlook for 2017
While natural gas prices are volatile in the best of times, added political considerations will only exacerbate this uncertainty in 2017. If the Trump administration follows through on substantively supporting coal, gas demand would likely fall and put downward pressure on market prices.
Even so, forecasts for a cold winter boosted prices to close 2016, as markets reached two year highs on the back of increased demand and inventory drawdowns. Per US EIA forecasts, this price level is likely to hold, but not increase, through 2017 with an average price of $3.55/mmBtu expected at Henry Hub, compared to 2016’s average of $2.51/mmBtu. The start of the year has not been kind, however, with February futures contracts falling towards $3.00/mmBtu, further reinforcing the uncertainty.
Even with this modest rebound, natural gas prices remain near all-time lows. As the marginal supply resource for much of the U.S. electricity industry, this will mean more of the same in 2017: low wholesale electricity prices and attractive opportunities for end-users to take advantage of by updating their procurement contracts and strategies.