Wednesday, August 12, 2009

WSJ: Wholesale electricity prices plummet

Today's Wall Street Journal has an interesting article (subscription required) by Rebecca Smith about the steep decline in wholesale electricity prices.
On Friday, the nation's largest wholesale power market serving parts of 13 states east of the Rockies is expected to report that electricity demand fell 4.4% in the first half of the year. That helped to push down spot market prices by 40% during the first half of this year.

Wholesale electricity -- power furnished to utilities and other big energy users -- cost an average of $40 a megawatt hour in the region, down from $66.40 a year earlier. The price declines in this market, which extends from Delaware to Michigan, come on top of a 2.7% drop in energy use in 2008 over 2007.
These wholesale price quotes aren't for the ISO-NE market, but my guess is that electricity prices for NH are also down.  We'll have to wait to see if the trend lasts and if it turns into relief for ratepayers.

What's most fascinating about this article to me is that it only took a 4.4% drop in demand to push prices down by 40%.  Economists would say that prices in markets such as these are set at the margins.  In other words, very small changes in supply or demand can result in very dramatic changes in prices.  To be fair, there are factors other than just demand for electricity pushing down prices.  The article goes on to mention that the price of natural gas (widely used to produce electricity) has declined from $12 per MMBtu in 2008 to around $4 currently.

Still, IMO this is similar to forces at work last year pushing up the prices of oil and gasoline so dramatically.  Just a few percentage points of extra demand from the raging economic growth in China and India, perhaps coupled with a small impact on supply from speculators and hoarders, resulted in intense price spikes.

Next time someone suggests that small increases in renewable energy production, or small energy efficiency increases don't matter much, remind them of what a 4.4% drop in demand did to electricity prices in the summer of '09.

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