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EnergyWindow MarketElert TM - October 2006
www.energywindow.com
October Elerts
Illinois
The Illinois Auction was held September 5-8 to determine prices for default electric generation service for ComEd and Ameren (CIPS, CILCO & IP) customers, beginning January 2, 2007. Auction prices varied widely between groups of customers. Those assigned to or choosing the fixed annual rate are looking at annual fixed rates ranging from $93-102/MWh in ComEd and $68-74/MWh in Ameren's territories.
This means commercial customers on the fixed annual option are looking at supply increases of 60-70% in ComEd (and more than 100% if they have been served by an alternate supplier), and those in Ameren will see increases of 40-50%. Smaller C&I accounts in ComEd will be paying much lower rates, typically in the $70-73/MWh range.
Depending on size and current status, customers in all the affected utilities may be assigned or will have the chance to choose an hourly option, where they are charged the hourly price for energy (in PJM for ComEd, or MISO for Ameren). All accounts now being served by a retail supplier and returning for their December read will return to an hourly-priced rate unless they choose the fixed option in which case they cannot leave utility service for 17 months. Enrollment periods are 50 days for accounts less than 3,000kW (deadline Nov. 10th) and 30 days for larger accounts (deadline: Oct. 21).
Two issues that could cloud things up: 1.) the hourly capacity price from the auction was rejected and it is not known at this time how that option will be charged out, and 2.) the Illinois state legislature is considering a bill that would extend the rate caps for three years. It is not known how electricity would be bought and paid for if that were to occur, as current contracts for power end on January 1, 2007.
Don't Let Price Anxiety Cause Purchase Paralysis
Given the range of energy prices over the last four years - $3.80 to $12.48 per million British Thermal Units (mmBtu) and $28.78 to $103.42 per megawatt-hour (MWh) for the average of the 12-month strip for Henry Hub natural gas and PJM electricity, as traded on the New York Mercantile Exchange (NYMEX) - every retail energy buyer grapples with issues such as purchase timing, facility cost estimating, and budget forecasting. How can buyers avoid "purchase paralysis?" Here are two suggestions.
Track to the Futures
Correlations show the average of the NYMEX 12-month Henry Hub natural gas strip is a good gauge of both electric and natural gas wholesale and retail prices in most markets in North America (see how in our new white paper). The figure at the right shows the values over the last decade, to which we have fit a constant rate of increase trend line. The fit is extremely good, with the correlation coefficient greater than 0.92. So notwithstanding short-term volatility, the underlying trend has been very close to 15% per year, higher over the last five years. And few experts suggest the underlying tight supply-demand conditions are likely to abate over the next decade (see Outlook for Natural Gas: 2005 and Beyond and America's Natural Gas Challenge 2006 in the Recommended Reading section at www.energywindow.com/press/#WhitePapers). Thus, history and current expert opinions suggest that wholesale and retail energy prices are likely to continue to increase over longer periods of time, but continue to be quite volatile in the short term. You may want to consider this important input when developing your energy supply strategy for the next 4-7 years.
Timing the Trigger
We have added to the graph at the beginning of this newsletter (the average of 12-month NYMEX Henry Hub gas future closing prices over the last 4 years) a constant rate trend line and a confidence line. The trend line is approximately 21% per year. The graph also shows that on October 16, the closing 12-month strip average of $7.90 per mmBtu was at the 98% confidence level; that is, relative to the average trend line, prices were above that value 98% of time during the previous four years. Barring some discontinuity or shift in energy market behavior, prices may be expected to be above that confidence line 98% of the time over the next four or more years. The confidence level may be useful in deciding when it's a relatively good time to buy or fix prices. Conversely, it can be used to set a "trigger" point (say 70%) when to fix prices or to execute contracts for fixed prices.
More Answers
The new EnergyWindow white paper, Shedding Light on Energy Price Trends and Their Drivers, explores additional details, background, insights, and digs deeper to answer your energy supply price questions.
Visit EnergyWindow at the AME show in Dallas!
EnergyWindow will be at the Annual Conference of the Association for Manufacturing Excellence in Dallas, October 16-18. Stop by booth #808, and we'll give you a free market analysis that shows where your company can save money on energy supply.
We'd Like to Know What You Think
Let us know what you'd like to see in MarketElert, or give us your comments or questions. Just email us at melert@energywindow.com.
Free Market Data and Information Available Here!
(www.energywindow.com/decisionsupport.shtml)
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Copyright © 2006 EnergyWindow, Inc. All Rights Reserved.
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