Theoretically, as higher natural gas prices work their way through power prices in the U.S., states with higher natural gas contributions to their generation stack should see higher relative power price increases and those with higher renewable contributions to their generation stack should see lower relative power price increases. The opposite should occur for each with lower natural gas prices.
January 2022 power prices are the most recently available from the EIA. We take a look at the data to begin to track the relationships between natural gas, wind and solar mix and power prices.
It appears the relationships are something to keep an eye on.
Power Prices Versus Generation Mix
The move this year in natural gas price has taken the commodity to levels not seen in over a decade. As shown via the shading below, natural gas prices dropped between January 2018 and January 2020 and rose from January 2020 to January 2022. We will focus on those contrasting two year periods in time to see the impact on power prices.
EIA datasets include retail, commercial and industrial power prices at the state level. Power prices generally include fuel and operational costs at the power plant level, transmission and distribution charges and a number of potential state Public Utility Commission (PUC) mandated or approved charges which ultimately all form the basis for a $/Kwh which is applied to a customer's usage.
Electricity prices vary by location based on supply and demand, fuel mix, allowed ROE and other factors. Retail prices are typically the highest due to higher transmission and distribution (T&D) charges.
Industrial prices are the lowest and are generally the closest to wholesale power prices. These customers can receive power at higher voltage, reducing T&D charges and creating efficiencies and cost savings. Industrial prices will be our focus to get as close to the fuel price-only impact as possible
Lower Natural Gas Price Environment
We first looked at the lower natural gas price period from January 2018 to January 2020 and plotted the change in industrial power prices versus the percentage mix of generation from natural gas and wind & solar, by state.
The linear interpolation of both charts show the expected relationships, with a slightly stronger correlation to natural gas generation as a percentage of the mix. Lower natural gas prices led to lower fuel charges. 42 of 50 states saw industrial power prices decline during this timeframe as natural gas dropped 25-30%.
Higher Natural Gas Price Environment
Next we looked at the recent higher natural gas price environment from January 2020 to January 2022 and plotted the same data.
The correlation and interpolation has inverted for both sets of data. States with a higher mix of natural gas are seeing higher industrial power price increases and those with higher a renewable mix are seeing lower increases. Only four states saw lower prices during this timeframe with three of four utilizing 20% or more of wind and solar in their state generation mix.
As should be expected, higher natural gas prices appear to be hitting states with the highest natural gas generation mix with the largest power price increases. If this relationships continue to hold, the interpolation inversions for both sets of data should get steeper the next few months as even higher natural gas prices roll through fuel charges.
Top-10 Highest and Lowest Natural Gas Generation States
With the higher correlation to natural gas mix - as would be expected - we also also took a look at the change in industrial power prices from 2020 to 2022 from the top-10 states with most and least natural gas as a percentage of their generation mix. The states with the highest natural gas mix saw materially higher average industrial power price increases.
We looked at the top-10 highest and lowest wind and solar generation states and the delta was not as large, continuing to point to natural gas primarily driving the recent power price increases in many states, along with overall costs increases for all services. We also took a look at coal mix, which did not show much sensitivity across the different time periods, barely shifting its interpolation curve shape.
By no means is this analysis all-encompassing or conclusive but it would seem intuitive that spiking natural gas prices would find their way into power prices quicker than capital expenditure inflation. Solar and wind have no fuel costs. Recent cost inflation will take time to make its way into power prices. With the move in natural gas prices since the end of January 2022, these relationships will be interesting to watch over the coming months.
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