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Electricity Generation from Natural Gas Predicted to Drop in 2020

The September natural gas contract closed on Thursday at $2.128/MMBtu, just 0.33% higher than last week’s closing price of $2.121/MMBtu. For the week ending 8/2/19, we saw a 55 bcf injection, slightly lower than the 60 bcf addition expected by analysts. The total 2,689 bcf of natural gas currently in storage is 14.6% above last year but still 4.0% below the five-year average. “Lower costs for natural gas drive EIA’s forecast that annual average wholesale electricity prices will be lower in 2019 than last year in all areas of the United States” (EIA).

EIA’s Short Term Energy Outlook report released this past Tuesday predicts that electricity generation from natural gas-fired power plants will rise from 34% in 2018 to 37% in 2019 but then drop slightly in 2020. Generation from coal will average 24% in 2019 and 2020, which is lower than the 28% seen in 2018. “EIA forecasts that renewable fuels, including wind, solar, and hydropower, will collectively produce 18% of U.S. electricity in 2019 and 19% in 2020… and that annual generation from wind will surpass hydropower generation for the first time in 2019 to become the leading source of renewable electricity generation and maintain that position in 2020” (EIA).

Natural gas pricing plays a key role in electricity power pricing due to the increasing reliance on natural gas-fired generators as nuclear, coal, and oil generation is retired and mothballed. As the marginal unit of generation, gas prices are directly correlated to power pricing (more so in some regions such as NYC vs. others such as parts of PJM). We keep an eye on natural gas market fundamentals in order to provide insights into forward power pricing for our clients. Gas production is expected to continue to grow, however, there is speculation that demand growth will outpace supply primarily due to LNG and Mexican exports and increased power burn, presenting upside risk to power pricing in the future.

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