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"This has primarily been replaced by gas combined cycle units (27% in 2016, 18% in 2015), gas simple cycle units (26% in 2016, 23% in 2015) and wind resources (9% in 2016, 6% in 2015)," the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