Wholesale electricity price declines in 2016, tied to natural gas cost

Wholesale electricity prices declined at major U.S. trading hubs in 2016, and the fall was primarily driven by the low cost of natural gas, “which is the fuel that often determines the marginal generation cost in most power markets,” according to U.S. Energy Information Administration. And 2016 was the first year in which natural gas was the primary source of U.S. electricity generation. In the first quarter of 2016, average wholesale electricity prices fell 64% in New England and 24% in California, compared to the same quarter of 2015. Throughout the remainder of 2016, the prices were “slightly below 2015 prices,” averaging between $45 and $20 per megawatt hour.

The cost of natural gas used by power generators fell 17% to an average of $2.78 per million British thermal units in the first 10 months of 2016, compared to the same period in 2015, according to the most recent data available. “Milder winter weather in early 2016 also helped keep power prices lower than during the winter of 2014-15 when wholesale prices in the Northeast peaked in response to cold temperatures and constraints on getting fuel into the region.” In February 2016, the average wholesale electricity price fell 75% to $34 per megawatt hour, from $138 per megawatt hour in February 2015. “Wholesale power prices began slowly increasing in December as colder winter weather set in, which led to increasing natural gas prices.”

The low cost of natural gas led to an increase in its use for U.S. electricity generation in 2016, “largely at the expense of coal-fired generation.” Between January 2016 and October 2016, the amount of natural-gas fired electricity generation rose 6%, compared to the same period in 2015. But coal-fired electricity generation fell 12%, over the same periods. In April 2015, “natural gas-fired electricity generation first exceeded coal-fired generation as the primary source of electricity. Natural gas was the leading source of electricity for nearly every month of 2016, accounting for an estimated 34% of total utility-scale power generation, compared with a 30% share for coal-fired generation.”

A total of 24 gigawatts of utility-scale capacity was set to be added to the U.S. power grid in 2016, and more than 90% of this capacity can be attributed to natural gas, solar and wind plants. Capacity related to coal-fired plants was cut by 2.5% or 7 gigawatts.