GUERNSEY Economists' Leading Edge Research

Wind Generation Has Limited Impact on ERCOT’s Market Prices -- The charts in this downloadable PDF show a direct comparison of ERCOT West wholesale market prices in Texas and ERCOT wind generation by hour and month for 2008 and reveal a mismatch between power market values and generation. As the charts show, as expected, the highest market prices were in the summer afternoons, i.e., in June, July and August, but this is exactly when capacity factors were the lowest for the year. Conversely, during the winter months when the market prices are low, the wind generators experienced higher and more balanced capacity factors throughout the day.

This pattern not only limits wind generation’s potential impact on peak market prices, but it also dampens the expected returns to potential investors in wind generation.

Gas-in-Storage Still a Major Barometer for Gas Prices -- As an indicator of gas market supply and demand balances, natural gas in storage is probably the most important piece of information to gas market participants. Recession in the last two years is a cause of record-high gas storage, along with relatively mild weather and new supplies from shale production. Before the market entered this withdrawal season, along with factors such the economy and declining oil prices, gas prices were battered by a glut of gas in storage. With a late start of drawdown, the storage level reached a record high of 3837 Bcf for the week of November 27, 2009, which in the past was typically a withdrawal week.

For the first four weeks of withdrawal this season, most notably on Thursdays when the storage surveys were announced by the EIA, the gas markets were shocked by the storage surprises. For example, during the first week of December, storage withdrawal was about 20 Bcf higher than the market expectation, as measured by various analyst’s storage predictions; the market price jumped by more than 30 cents upon the news. The same thing happened a week later – another more than 30 cents jump. However, in subsequent weeks, storage drawdowns were lower than expected, and this lead to sharp declines in gas prices upon the storage news.

Typically, the drawdown numbers in mid-winter are hard to predict. The weather sensitive load is subject to the weather vagaries; however, the reactions of the gas prices to storage announcements mean that storage levels remain a reliable barometer of prices. During the 2009-10 heating season, the first four weeks’ drawdown totaled 561 Bcf-- much higher than the five-year average of 465 Bcf and last year’s 470 Bcf. For the next several weeks, weather forecasts call for frigid weather which is expected to eat into storage surpluses.

At this time, our model projects a storage level of 1550 Bcf at the end of the heating season. In comparison to other heating seasons, this one is likely to be marked as having started with a storage surplus, but ending with only an average storage level (see figure below).

Based on data from the past several years, after controlling for some other factors, storage draws, especially those that differ from the broad market expectations, have a significant impact on natural gas prices. According to our model estimates, every 50 Bcf that the storage drawdown differs from the market expectations puts approximately 30 cents pressure on gas prices in the opposite direction. Although our modeling indicates that these relationships may be non-linear, this is an average approximation covering a wide range of storage estimates, and it is useful for evaluating potential price impacts.

Opening Rockies Express Pipeline Enhances Competitive Performance of El Paso Permian Regional Gas Market -- The Henry Hub (HH) – El Paso Permian Basin (EPP) differential, or basis, shifted downward sharply with the opening on June 29, 2009 of the Rockies Express Pipeline – East (Rex – East). The chart shows this basis decline. Our econometric analysis of the natural gas market data confirmed statistically that this shift is significant and that it probably has increased the competitive structure of the EPP regional market.

In earlier years the EPP price reflected regional conditions in the production area while Henry Hub price tended to reflect the overall U.S. gas market conditions. For example, the Henry Hub price is linked statistically to the winter weather conditions in the northern states. However, the summer and winter temperature differentials, especially between southern and northern states, have been significant determinants of the HH-EPP basis. Our econometric analyses found this regional distinction to be robust. Moreover, the basis differential has been very volatile and at times quite large.

Since the opening of the REX-East pipeline, the HH-EPP basis differential has dropped precipitously, and our analysis indicates that the structural shift has generated a more competitive EPP price behavior. This, of course, is not surprising with increased supplies and market access, but significantly this change in the regional market may be long-term. The EPP price behavior and price levels are now similar to those at the Henry Hub.

This shift in market dynamics affects spot and futures market decisions, including hedging needs and opportunities, of regional market participants, and they probably should adjust the underlying strategies for their portfolios accordingly.

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Decline in Industrial Gas Consumption tied to Influences other than the Recession -- As the chart below shows, when seasonally and weather adjusted, the industrial natural gas consumption reported by the U. S. Energy information Administration experienced a sharp decline totaling 14% over the recessionary period since January 2008. Although the average monthly decline has been 80.4 Bcf over this period, this is the net effect of several market influences. Read the full article here.

C. H. Guernsey’s long-term natural gas price models, which are based on market fundamentals and historical market influences, reveal a likely Spring and Fall 2010 seasonality -- As the chart shows, this is contrary to the current NYMEX 2010 forward prices.

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Asymmetric price responses, market integration and market power: a study of the U. S. natural gas market -- A study of the price performance and the relative competitiveness of the trading hubs and regional natural gas markets. We determined that in some instances sellers captured economic rents (monopoly profits), in some instances buyers captured economic rents, but in most cases the regional markets evidenced competitive market behavior. See ScienceDirect for full article.

Direct price control and implied market power: The case of the U.S. natural gas market – A consideration of a price behavior analysis as a complement to the imprecise, but traditional, HHI method for determining market power in an antitrust investigation. We concluded that for certain industries an analyst could determine the presence or absence of competitive price behavior with statistical precision.

Angie Salyer
405-416-8203

• Intervention into ERCOT Transition to Competitive Markets
• Intervention into the Application of Southwestern Ion for Cost-Based Rates
• Intervention into FERC Conference on Supply Margin Assessment
• Estimate of Future Stranded Costs in Texas

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