Low natural gas prices may lead to higher power prices in BPA

Low natural gas prices may lead to higher power prices for Bonneville Power Administration (BPA) preference customers in FY 2014-2015.

Even in the hydro-rich Pacific Northwest, wholesale electricity prices are driven by the price of natural gas for several months of the year. The historically low price of natural gas recently has driven market prices down.

”We are required by law to sell [our] power here in the Northwest,” a BPA spokesperson told TransmissionHub on June 7. “We have our public utility customers and some large industrial customers [whom] we have firm contracts with, and we provide power to them first.”

BPA then sells surplus power on the spot market, which generates BPA’s secondary income. However, the agency is still under the legal requirement to attempt to sell that power in the Northwest, where prices tend to be lower. If there is no demand for the surplus power in the region, only then can BPA offer the power in other markets where prices may be higher, like California.

According to a 2011 report by bond ratings agency Fitch, BPA relies on secondary, or surplus, sales for approximately 22% of its total revenues. Forecasts of those secondary revenues are included in the rate cases used to set power prices for public utility customers.

“We use those revenues to help keep our rates lower than they would have been otherwise,” the spokesperson said, adding that secondary revenues were expected to contribute $415m to the agency’s 2012-2013 budget.

However, power prices on the spot market have been low in recent months, resulting in a shortfall in BPA’s expected secondary revenue.

Worse before it gets better

BPA is forecasting that natural gas prices may approach $4 as the 2014-2015 fiscal year approaches. That forecast suggests that its net secondary revenue will be $114m per year lower than what BPA assumed when it set fiscal year 2012-13 power rates. In that case, the agency estimates it would need to raise rates for its public utility customers by approximately 8%.

However, if natural gas prices stay at or near their current level of approximately $2.30/MMBtu, secondary revenue could decline by $196m annually, meaning BPA would need to raise wholesale rates by 14% to compensate.

While other factors will also affect the final rates, BPA said net secondary revenues alone are likely to have far and away the most impact on the agency’s power rates for fiscal years 2014 and 2015.

The long-term outlook is less bleak. BPA analysts do not believe the current price level represents equilibrium in the long-term marginal cost of gas production in a balanced market “but is a reaction to the abundance of gas in storage, probably the biggest driver of current prices,” the agency said in a statement published on its web site. “Over time, the market should rebalance to reflect a more appropriate equilibrium gas price around the $4 to $5 range,” according to BPA.

For the short term, however, production remains high, storage is at record levels and, thanks in part to mild weather, there are limited short-term opportunities for increases in demand, “all of which contribute to continuing lower prices as well as lower price forecasts,” the agency said.