Many factors affect wholesale electricity prices, and, in particular, they are highly correlated with spot natural gas prices. The amount of spare capacity on pipelines delivering natural gas into end use markets can affect the wholesale price of natural gas in a given market, which in turn, can affect wholesale electricity prices. Constraints on natural gas deliveries affect spot electricity prices in two general ways:
In regions where delivering natural gas pipelines are less fully utilized, spot natural gas prices tend to follow regional and national price averages more closely. Less constrained natural gas pipeline corridors can lead to electricity prices that reflect national benchmark wholesale electricity prices—which may move higher or lower depending on the market circumstance.
Changes in spot natural gas prices influence spot electricity prices in most regional power markets in the United States because natural gas tends to reflect the marginal fuel for power generation. Most electricity sold is in markets that use locational marginal pricing as a key component to determine the value of electricity by hour and location. The prices for electricity in a given hour are determined by the cost of the most expensive unit needed to meet demand. In many U.S. electricity markets the delivered price of natural gas sets the marginal price of electricity for many time intervals during the year in the day ahead and the real-time markets.
Reasons leading to various constraints on natural gas pipelines include:
The duration of these constraints varies, but it can generally be grouped into three categories. Short-duration occurrences are mostly related to temporary weather conditions or non-critical maintenance that can be resolved quickly. Moderate length congestion can result from lengthy repairs or heavy seasonal loads. Longer term, structural constraints are usually the result of local or regional imbalances in supply and demand that may require changes in infrastructure.
The map and table below show for select markets where natural gas pipeline constraints have contributed to material changes in wholesale electricity prices during the past several years.
1. New England. During the Bomb Cyclone event in late December 2017 and early January 2018, fully utilized pipelines constrained natural gas deliveries. Generators had to rely on more expensive sources of energy including distillate and residual fuel oil and liquefied natural gas, leading to high spot electricity prices.
2. New York. During the winter of 2013-14 Polar Vortex period, episodic bitter cold temperatures raised natural gas demand and congested pipelines. Spot natural gas prices topped $120 per million British thermal units (MMBtu) at one point and material generator-forced outages contributed to spot power prices of more than $600 per megawatt-hour (MWh) at the New York Independent System Operator (NYISO) Zone J.
3. Pennsylvania. Rising natural gas production in Appalachia since 2010 has generally outpaced the expansion of natural gas pipeline and processing infrastructure and depressed spot prices to substantial discounts to the Henry Hub benchmark.
4. Southwest. Rising associated gas contributions from well completions in the Permian Basin have outstripped increases in natural gas take-away pipeline capacity in the Southwest, and pushed down natural gas prices. In turn, this imbalance has contributed to generally low electricity prices in the Southwest Power Pool (SPP) South Zone and the Electric Reliability Council of Texas’ (ERCOT) West Zone and in western Texas generally.
5. Southern California. Maintenance and repairs to the Southern California Gas Company (SoCalGas) backbone transmission pipelines have limited natural gas deliverability in recent years. Reduced deliverability and Aliso Canyon Storage capacity restrictions have contributed to electricity price volatility.
6. Pacific Northwest. In the aftermath of the October 9, 2018 explosion on Enbridge’s BC Pipeline in British Columbia, U.S. gas imports into the Northwest Pipeline at Sumas, Washington, were reduced during the winter of 2018-19, and played a role in the March 2019 natural gas price spike that caused the spot electricity price at the Mid-Columbia, or Mid C, trading point in Washington state to rise to almost $900/MWh.
The mini charts below show examples of how natural gas constraints in recent years affected wholesale electricity markets for discrete events.
Increased natural gas demand and pipeline capacity has changed the potential for constraints in some regional U.S. wholesale energy markets. Overall natural gas use in the United States has grown by more than 30% since 2009. Average annual use of natural gas for power generation grew from about 18.9 billion cubic feet per day (Bcf/d) in 2009 to about 31 Bcf/d in 2019, up 65%. Natural gas accounted for about 37% of utility-scale generation in 2019, a larger share than any other source.
Analysts can get more information on the EIA website about energy trends that affect natural gas and electricity prices. The Southern California Daily Energy Report and New England Dashboard provide daily market updates on how regional natural gas flows influence spot electricity prices.
EIA’s About U.S. Pipelines webpage presents quarterly updates on the status of new natural gas pipeline projects; the commercialization of new natural gas pipeline capacity can affect electricity prices.
EIA’s Electricity Power Monthly provides information on changes on generator capacity additions or retirements for the upcoming year based on generator plans.
The Electricity Data Browser is an interactive tool that provides plant-level or aggregate historical data in graphical and map form.
EIA also provides access survey-level data files.