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March 8, 2011

Plentiful water and low natural gas prices cut Northwest wholesale power prices in half

Since the beginning of the year, Northwest wholesale power prices at the Mid-Columbia trading point have averaged 45% below the 5-year average (2006-2010) prices, and were well below the 5-year price range. One reason for lower wholesale power prices is that prices of natural gas at the Sumas trading point have averaged 36% below the 5-year average, and also have been below the 5-year range.

Natural gas provided 17% of the Northwest generation in 2009. But since natural gas-fired generation is often the marginal source of generation during summer and winter peak demand seasons, natural gas prices tend to drive wholesale power prices at these times of the year.

Another key reason for lower electric prices, especially in the second half of January and February, is the increased output from low-cost hydroelectric units. An unusual combination of warm and wet weather in the second half of January and early February melted low-elevation snow, filling hydroelectric dam reservoirs on the Columbia and Snake Rivers and boosting hydro generation. Snow runoff (and the resulting decrease in electricity prices) is a yearly event that usually awaits the spring thaw.

Since there are no fuel costs, hydroelectric plants are one of the lowest-cost ways of producing electricity. Hydroelectric capacity is such a large share of total capacity in the Northwest that when it is available, it can drive down wholesale power prices. But snowmelt water is seasonal, and the price-reducing effect of hydropower lasts only a few months a year, typically in late spring and early summer.

The National Oceanic and Atmospheric Administration&s Northwest River Forecast Center reported record-high temperatures at numerous locations and rainfall records at several locations in Washington State during the last two weeks of January. The high temperatures and rain helped melt much of the low-elevation snow that feeds into the Columbia-Snake River system.

The Columbia and Snake Rivers have a large number of run-of-river hydroelectric dams and a smaller number of larger dams with reservoirs designed to control the flow of water on the river. Once the reservoirs are close to being filled, water is released, preferably through the dam&s turbines to generate electricity. The reservoir at the Grand Coulee Dam, the largest dam on the Columbia River, was nearly full at the end of January.

Rain, snow melt, and reservoir releases increase river water flow. For example, water flow at The Dalles run-of-river dam, 192 miles upriver from the mouth of the Columbia, was well above the 5-year average during the last two weeks of January. The increased water flow drove electricity generation to levels significantly above the 5-year range over the same period (see chart below).