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SPP market monitor highlights rising prices, declining coal generation

Rising natural gas prices are supporting higher electricity prices in the Southwest Power Pool while coal generation continues to give up market share to gas-fired and renewable resources, SPP's market monitoring unit said in a recent report covering September through November.

Gas costs continue to rise overall and values in the south-central U.S. were no different with the average cost of gas at the Panhandle Hub for fall 2016 at $2.61/MMBtu, compared to $2.25/MMBtu in fall 2015.

"With the rise in gas costs, comes a rise in [locational marginal prices, or LMPs]," the reported stated.

The average real-time LMP for fall 2016 was $25.10/MWh compared to $19.98/MWh in fall 2015. The average day-ahead LMP for fall 2016 was $24.43/MWh compared to $20.73/MWh in fall 2015.

Average gas costs had been on a general upward trend since the record-low average price of $1.50/MMBtu in March 2016, nearly doubling to around $2.75/MMBtu by September and October before dropping back to close to $2.30/MMBtu in November.

Energy produced by coal generation continues to decline in the SPP footprint. In the fall of 2014, 60% of energy was produced by coal generation, however that market share declined steadily in 2015 and was at just 50% by fall 2016.

At the same time, wind generation continues to increase in SPP, accounting for just over 20% of all energy produced in fall 2016, compared to 16% in 2015 and 13% in 2014. According to the SPP report, this is the second-highest three-month period for wind generation, surpassed only by spring 2016 at 21.5% of all energy produced by wind resources.

The market monitor found that coal resources on the margin in the real-time market continue to decline with coal resources setting prices 37% of the time in fall 2016 compared to 52% in 2015.

"This has primarily been replaced by gas combined cycle units (27% in 2016, 18% in 2015), gas simple cycle units (26% in 2016, 23% in 2015) and wind resources (9% in 2016, 6% in 2015)," the report states.

In addition, SPP markets are experiencing some divergence between day-ahead and real-time prices, due partially to significant price volatility in the real-time market.

Also, due to an abundance of lower-cost generation in the northern part of the SPP footprint, prices at the North Hub are consistently lower. The average spread for real-time prices between the North and South Hub for fall 2016 was $8.78, compared to $6.73 for fall 2015. The spread for both day-ahead and real-time prices in September was around $12, compared to $8 and $4 for October and November.