US and Europe through a prism of electricity prices

Persistently low electricity prices are having an impact on virtually everything that touches the US power sector. Something of the opposite is beginning to be said in Europe.

Dozens of US-based companies reporting third quarter earnings—and earnings thus far this year—have said their revenue is down due not just to reduced demand but also due to low prices.

On November 12, the  Moody’s ratings agency noted that a dozen big-name firms that own unregulated power affiliates, or are pure merchant generators—the list included PSEG, Exelon, PPL, First Energy, NextEra Energy, Dominion, Entergy, NRG Energy, Dynegy, Energy Future Holdings and Edison Mission Energy—have been experiencing “financial stress” for four years and can expect “little relief from today’s commodity price environment—a main cause of the stress—over the next 24 months.”

The ratings agency said the combination of low prices and “tepid expectations for growth in electricity volumes” could mean that companies will have to cut costs and delay capital investments.

 Today, US wholesale peak power prices are in the high $20’s—low $30’s/MWh range. They are essentially at that low level because natural gas prices are in the $3.30/MMBtu to $3.40/MMBtu range. Five years ago, according to Platts data, that wholesale electricity price range was between $52-$55/MWh.

The much publicized argument over whether Congress should, or shouldn’t allow the production tax credit for wind farm developers expire on December 31, has a distinct, though often overlooked, power price element to it.  

The availability of the PTC adds roughly $22/MWh to the price of generated wind power that goes to the wind company doing the generating.

What that means is that a wind farm company will sign a power purchase agreement with  an off-taker and accept the $28-$32/MWh price, knowing that the PTC –if available– will push that price up to between $50 to $60/MW/h.  Without the PTC being available, however, it is the low price that is keeping the wind generators from signing PPAs.

If the wholesale power prices were higher, the PTC would not mean as much. With low prices and a disappearing PTC, the wind guys are doubly impacted, and thus deciding to put off developing wind farms in the US and looking to do business abroad.

In another case, Moody’s lowered its credit outlook from stable to negative on the 1,022 MW La Paloma natural gas-fired facility in McKittrick, California, located just north of Los Angeles.

Already facing a weak debt service coverage ratio, Moody’s said the facility faces a “potential drop” in its cash flow due to two things: lower-than-expected wholesale power prices from persistently low natural gas prices, and higher costs from the expected implementation of the state’s cap-and-trade program.

On November 14 the California Air Resources Board held its first auction of carbon credits for 2013 and 2015, selling the emissions at roughly $10/metric ton. Analysts say that carbon at that price translates into roughly $4/MWh for power generators.

The problem that La Paloma has is that the long-term legacy contracts it has with off takers have no pass-through provision of the carbon credits’ costs.

If wholesale power prices are low, retail electricity is selling at a relatively high premium, though even those prices have been flattening.      

On November 6, the EIA estimated the nominal US residential electricity price at 11.80 cts per kilowatt hour.  (If put into megawatt terms, that would be $118/MWh).

 The Energy Information Administration said it expects, though, that the nominal US residential electricity price will barely increase this year, by just 0.1%, “which would be the smallest year-over-year increase in ten years.”

The EIA said it believes residential retail prices in 2013 will increase only 1.5%, to about 11.98 cts/kWh.

It’s interesting to compare some of these numbers to the prices in Europe along the fuel, wholesale, retail, chain.

When converted from Euro’s to US dollars at a 1 Euro to 1.28 US dollar rate, the price of wholesale power in Germany on November 19 was $62/MWh, according to Platts European Power Daily. The price in France was $63.55/MWh.

Retail electricity prices in May, according to Europe’s Energy Portal, and again converted at 1.28 US dollar rate, were 18 cts/kWh in France, 25 cts/kWh in Italy,  26cts/kWh in Sweden,  and 32cts/kWh in Germany.  The highest price was in Denmark, at 37cents/kWh.

 The high price of power in Europe is due to the relatively high price of natural gas. According to Platts European Gas Daily, the gas midpoint price on November 16 in France was $10.40/MMBtu, in Germany $10.33/MMBtu, and in Italy, $10.50/MMBtu.

In the UK, while demand appears to be falling, the price of electricity remains high due to high natural gas prices.

 A colleague, Daniela Coiro, wrote last week in European Power Daily that in Italy’s falling demand, due to the economic downturn, when mixed with high electricity prices “(is) challenging energy intensive industries’ competitiveness,” and writes that Italian industries like cement, smelting and steelmaking maybe looking to relocate overseas.

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