The Energy Futures Trends Chart:
What Does it Mean?

Each month we present special features, among them a chart showing jagged lines depicting two of the most important indicators of where the wholesale futures markets stand. We provide this chart each month in order to begin to provide 1) insights, over time, as to what level wholesale prices produce competitive retail prices low enough to result in savings opportunities relative to default prices, 2) one input to decisions regarding when to solicit, and accept, competitive bids, and 3) one readily available measure of market levels useful to retail energy buyers considering longer term contracts.

The blue line represents the average of the most current 12 months of the NYMEX (New York Mercantile Exchange) Henry Hub natural gas commodity futures plotted each day over the last year and a half or so. This 12-month "strip" approximates the average unit cost a retail supplier would have to pay per MMBTU (Dth) for 10,000 MMBTU of natural gas delivered to the Henry Hub in Louisiana for one year going forward. These prices are shown on the left-hand side of the chart. Turning wholesale into retail gas still requires pipeline costs, balancing, administration, margin and other fees, but this snapshot quickly communicates the relative position of the current forward market for gas and with it, one indication of what kind of prices one might expect to see from retail suppliers or, eventually, local distribution companies for default service.



The magenta line shows the 12-month strip for the NYMEX PJM electricity futures, which is the average unit cost for the next 12 months delivery of 40 megawatt hours (MWH) per non-holiday weekday between the hours of 7 am and 11 pm to the PJM western hub. Prices are in dollars per MWH and are indicated on the right side of the chart. PJM is the oldest and most liquid wholesale electric market in the country. Other regional electric markets vary, but generally follow the up and down pattern illustrated here. Again, turning a wholesale price into a retail product requires adding a number of elements including transmission, capacity, line losses, ancillary services and the retailers. costs and margin. Based on knowledge of these additional costs and an idea of the utility tariff costs in a given area, one can draw some conclusions about whether savings might be available for a set of accounts and roughly what to expect. For example, based on last year's Standard Offer Service auction in Maryland, Type II customers (< 600 kW commercial) might see savings when PJM futures hit about $54.00/MWH (or 5.4 cents/kWh) or so, while New Jersey fixed price accounts might have to wait until the strip is down to $49.00/MWH.

You'll notice that there is a very strong correlation between the natural gas and electricity futures. This is because natural gas is being increasingly used to generate electricity. In fact, almost all of the new generation built in the last several years has been powered by natural gas, and virtually all of the generation destined to come on line in the next few years will be, as well. Any time the demand for electricity goes above the level able to be served by less expensive units like those run on hydropower, nuclear or coal, the price set for electricity dispatched during those hours is almost surely set by natural gas units.

If you'd like to know more, or are curious about what range of prices might indicate savings opportunities for specific areas or account types, give us a call.