Market Analysis for Electricity Prices in the Competitive Power Market: A Year-End Review and Outlook to 2024 and Beyond

As we conclude 2023, it's essential for businesses, schools, local governments, and non-profits to grasp the evolving dynamics in the competitive power market. This analysis offers a review of the current landscape and a forward-looking perspective into 2024 and beyond.

Key Drivers of Electricity Prices

1. Natural Gas as a Proxy for Electricity Prices: The link between natural gas and electricity prices continues to be a key determinant. With natural gas prices set to rise in the coming years, electricity prices are expected to follow a similar trend. Currently, the market is in contango, suggesting lower near-term prices compared to the future, a shift from the earlier state of backwardation.
2. Natural Gas Storage and Rig Count: At the onset of the natural gas injection season, which runs April to November, storage levels were 22-23% above the five-year average. However, current storage as of December 2023 is only 6% higher than last year and the five-year average. This, coupled with a 33% reduction in the natural gas rig count from 166 rigs in the spring to only around 110, indicates a potential future decrease in natural gas availability.
3. Increasing Demand and New LNG Plants: The upcoming activation of new liquefied natural gas (LNG) plants in the U.S. will notably influence demand. These plants will boost LNG exports to European and Asian markets, where prices are 4-5 times higher than the United States,  intensifying competition for domestic power companies and impacting electricity prices. Expectations are for LNG exports to increase by 20-30% in the next two years going from 14.6Bcf to 18Bcf or more.

Market Trends and Predictions

1. Continued Volatility: Expectations point towards sustained market volatility, with greater fluctuations in prices, driven by variable natural gas costs and supply-demand dynamics.
2. Weather Influences: Recent trends show a decline in near-term prices due to milder winter conditions. However, weather unpredictability remains a critical factor affecting demand and pricing.
3. Supply-Demand Tightening: The market anticipates a tightening supply-demand balance from mid-2024 onwards, leading to higher prices moving into 2024 and beyond.
4. Impact of EVs on Electricity Usage: The surge in electric vehicle (EV) adoption is set to increase electricity usage and increase demand for natural gas. This rising demand, driven by EV charging needs, will further influence electricity market dynamics and pricing structures.
5. Material Bottlenecks in Solar Energy Expansion: While solar energy is increasingly viewed as a viable alternative to reduce reliance on natural gas, its near-term impact is limited by material supply bottlenecks. Critical components such as silver and polysilicon, essential for solar panel production, are currently in short supply.

Recommendations for Business and Public Sector Clients

1. Strategic Energy Contracting: We recommend securing electric power prices during periods of relative weakness in the market for as long as possible, in anticipation of future increases and within the constraints of specific issues related to the outlook for your business or organization.
2. Solar Power Adoption: Diversifying with solar power can reduce demand for public utility generated electric power and offer more stable pricing.
3. Energy Efficiency Technology Implementation: We recommend that businesses and public sector clients adopt a range of energy efficiency technologies, including LED lighting, advanced heating and cooling systems, IoT monitoring devices, electric power filters, and water conservation methods, to reduce energy usage and costs.
4. Utility Expense Management for Complex Organizations: For larger, more complex organizations, we recommend implementing a utility expense management system to efficiently track, allocate, pay, optimize, and proactively report on services and expenses, with detailed breakdowns by provider, type, location, cost code, and more, ensuring comprehensive oversight and optimization of energy resources.

Menadena is equipped to assist in exploring all of the above options and managing competitive power contracts.

The competitive power market in the United States, heading into 2024 and beyond, is poised for significant shifts, with natural gas prices and new LNG infrastructure being key influencers. Menadena is dedicated to guiding businesses, schools, local governments, and non-profits through these changes, ensuring efficient and sustainable energy solutions.