Where are energy rates going for 2020? And what are the trends to watch? In this article we examine some of the important factors in energy rates, including: natural gas prices, the continued growth of renewable energy, and potential changes in capacity markets.
Summary of US Energy Trends for 2020
- Natural gas continues to be the primary source of electricity production in the US.
- Renewable energy will continue to grow due to state Renewable Portfolio Standards, Federal Tax Credits (which phase down in 2022) and lower cost of raw materials, particularly for solar panels.
- Capacity markets in PJM, MISO, NEISO and NYISO may undergo significant changes due to FERC orders issued in late 2019. The increased uncertainty may drive consumer prices up.
US is a Net Energy Exporter
First, some positive news on US energy trends.
According to the EIA, the United States first became a net natural gas exporter in 2017, and continued to export more natural gas than it imported in both 2018 and 2019. With LNG (liquified natural gas) exports continuing to expand, the US will be a net natural gas exporter in 2020.
Perhaps even more surprising is this fact. The EIA projects that the US will be a net energy exporter in petroleum products in 2020.
Natural Gas Prices Low With Abundant Supply
For 2020, natural gas will remain on top as the single largest fuel source for electricity in the US, generating 38% of all power in the US.
While the US has made steady progress in wind development (especially in Texas) and solar development (driven by utility incentives in the northeast), we still need natural gas plants for reliable baseload generation. (More on that below.)
Natural gas is cheap and plentiful right now. The EIA projects that supply will continue to outstrip demand, leading to a 9% decrease in price vs. 2019.
That’s good news for consumers, especially in Texas, where more than half of all power comes from gas. It’s also positive news in the northeast, where natural gas powered plants have replaced retiring coal-powered plants.
Gas-fired peaker plants — those that can come online quickly to satisfy a peak in demand — will continue to be an important part of the electricity production equation, even as renewable energy grows.
Renewable Energy is Growing Across the Country – Driven by Solar
The EIA projects that U.S. electricity generation from renewable sources will double over the next 30 years, from 19% of total generation to 38%. Much of that growth will come from solar.
Solar is expected to grow from just 14% of total renewable generation in 2019 to almost 50% of total renewable generation by 2050. That equates to 19% of all power in the US coming from solar in 2050.
Five factors are driving solar power growth in the US:
- Federal tax credits
- Demand for renewable energy (through consumer demand and renewable portfolio standards)
- Declining production costs for solar panels
- Declining capital costs for installation
- Declining costs for utility scale lithium-ion battery installations (to store power)
The Relationship Between Natural Gas & Solar – The Duck Curve
Growth in renewable energy has been promised since the 1970’s and is finally coming to fruition. But natural gas plants and renewable energy production will grow hand in hand due to what’s called “The Duck Curve.”
The Duck Curve is a cute name for a serious issue. And it’s why reliance on 100% renewable is not a near term reality.
The California ISO originally observed this phenomenon in 2012. The Duck Curve describes power consumption over the course of a day. And it shows the timing imbalance between peak demand and renewable energy production.
The ramp up (duck’s tail) starts in the morning as people prepare for the day ahead. Demand drops right around the time that solar power starts to kick-in production around 7am, leading to a glut in power. Then, as the sun starts setting for the day, natural gas power plants and other resources must ramp up to meet evening demand (the duck’s neck). And then those resources must be reduced or shut off as demand dissipates at night (the duck’s bill.)
The mis-match between demand and supply means that natural gas peaker plants continue to play an important role. But utility scale solar arrays and wind farms will increasingly be built with large battery storage capabilities.
The cost of lithium-ion battery storage fell 35 percent from the first half of 2018 to December 2019 and 76 percent since 2012. Lower cost battery installations will allow generators to store solar and wind energy. Batteries will allow these resources to release power to the grid during times of scarcity, reducing reliance on gas peaker plants.
Capacity Markets in Turmoil – Increased Risk
The PJM Capacity Market helps ensure the grid’s long term reliability by paying power suppliers to be on standby as an available resource. Economists model predicted energy needs 3 years in the future. Power generators then bid on and receive contracts requiring them to generate power during system emergencies.
(The PJM Interconnection serves 13 states and Washington DC. Similar capacity markets exist in New England and New York, and the Mid-Central states)
The cost of capacity? It amounts to around 20% of the overall cost of energy in these markets.
Well, the capacity market was thrown into turmoil in December 2019. That’s when FERC (Federal Energy Regulatory Commission) released a long-anticipated decision on how the price is set for capacity.
FERC ruled that PJM needed to change the Minimum Offer Price Rule (the rate setting mechanism for the capacity market) to include renewable resources. Previously, gas-powered generation costs set MOPR.
PJM and other market leaders are still working through implications. However, it means that the PJM Capacity Auctions for 2022 and 2023, which were suspended in 2019, have still not been scheduled.
Overall the FERC order brings uncertainty into the market.
Each consumer in the market pays their share of capacity costs through their assigned capacity tag. PJM establishes this capacity tag annually based on the meter’s peak consumption over a 4 month period each summer.
Our expectation is that this uncertainty will cause rates for residential and small commercial to increase. Market rules seldom allow capacity costs to be billed to protected customers retroactively.
For commercial customers we expect energy prices to follow wholesale market forces, since capacity costs are typically a direct pass-through, and not included in energy costs.
Market leaders in other ISOs will continue to monitor the PJM/FERC interaction to see the implications for their capacity auctions.
Texas ERCOT Market Bracing for Summer
The ERCOT (Texas) market deals with scarcity and reliability in a different manner. Rather than a capacity market that guarantees resource availability, ERCOT relies on market trading to attract generation, with a price cap of $9,000/MWh (or $9/kWh).
To plan for the summer peak season, ERCOT issues a reserve margin forecast. The reserve margin measures that amount of production available versus expected demand. ERCOT likes to maintain a 13.7% reserve margin for reliability.
ERCOT’s first projection for 2020 summer reserve margin is 10.6%. That’s lower than the target reserve margin, but 2% higher than the 8.6% reserve margin that we had going into 2019 peak demand season.
Power prices for 2020 are elevated as traders are concerned about shortages. Longer term energy contracts are more affordably priced.
Shop for Electricity Plans
With market uncertainty, residential and business electricity consumers in deregulated markets are looking to lock in fixed rate plans.
But if you spend over $2,000 a month on electricity, or if your contract expires more than 30 days out, call us to shop your options: 844-244-5559.
Residential consumers can secure fixed price contracts as much as three years into the future, knocking out some of the uncertainty. Texas residential customers can use an electricity bill calculator to compare rates and find the one that matches their usage pattern. Ohio and Connecticut customers can easily shop rates to save versus their utility price to compare.