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Higher Natural Gas Prices Push Up U.S. Wholesale Electricity Prices

Rising fuel costs, especially those of natural gas, drove up wholesale electricity prices in all U.S. regions in 2021, the Energy Information Administration (EIA) said in an analysis on Friday.

Average wholesale prices for electricity at all major trading hubs in the United States were higher in 2021 than in 2020 as a result of the rising costs of the fuels used for power generation. Natural gas accounts for the single largest share of U.S. electricity generation and represented 40 percent of the fuel used for power in 2020.

“The cost of natural gas is a significant driver of electricity prices because it often acts as the marginal (highest cost) fuel of generating units that operators dispatch to supply electricity,” the EIA said.

Apart from generally higher natural gas prices in 2021 compared to 2020, the Texas Freeze in February 2021 also led to spikes in regional wholesale electricity prices in several regions during and after the winter storm.

Before 2021, U.S. natural gas prices were relatively low thanks to abundant supply. The cost of natural gas delivered to electric generators averaged $2.40 per million British thermal units (MMBtu) in 2020. But in 2021, rising demand amid a muted supply response led to higher natural gas prices and the delivered cost of natural gas to electricity generators jumped from $3.19/MMBtu in January 2021 to an estimated $5.04/MMBtu in the fourth quarter of 2021, the EIA said.

Due to the high natural gas prices, all regions saw higher wholesale electricity prices in 2021.

For example, average electricity prices during the second half of 2021 averaged $45/MWh at the Illinois hub in the Midcontinent ISO market, up by a massive 97 percent from the second half of 2020. Average electricity prices at the SP15 hub in the California CAISO market was $61/MWh in the second half of 2021, up by 37 percent compared to the same period of 2020, the EIA has estimated.

By Tsvetana Paraskova for Oilprice.com

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  • George Doolittle on January 10 2022 said:
    Solar power inputs are only coming on line right now and represent a direct threat to natural gas peaking power units.

    More to the point is "Wind Power 2.0" in the USA which has already been grandfathered in from the first iteration of Wind Power 1.0 in North America. Straight up to include imports particularly from Canada and excluding nuclear power the USA is still suffering from a truly massive glut in electricity outside of Texas and California.

    This excludes the Tesla Supercharger Network which presumably is highly energy efficient.
  • Mamdouh Salameh on January 08 2022 said:
    Since Britain voted with a small margin on 23 June 2016 to exit the European Union (EU) which became popularly known as Brexit, the British economy has been facing anaemic growth, volatility, weakening pound sterling and a rising cost of living including swelling energy costs with the prospect of higher tax bills in 2022.

    In the aftermath of the British public vote, I wrote a short research paper titled: “Brexit: Great Britain’s Second Suez” for the ESCP Europe Business School in London in which I described Brexit as Great Britain’s second Suez. The British people were conned under false pretences to vote to leave. They are now paying a heavy price for the Brexit blunder and will continue to do so well into the future.

    For those who weren’t born at the time of the first Suez crisis, it happened sixty six years ago when Great Britain colluded with France and Israel to attack Egypt in order to regain the Suez Canal and remove the late Egyptian President Gamal Abdel Nasser who had just nationalized the canal. The crisis humiliated Great Britain, France and Israel and handed the late President Nasser a great political victory. Nasser emerged as the unquestioned idol of the Arab people.

    Even with Britain outside Brexit, it will continue to be affected by what happens in the EU well into the future. The still raging energy crisis in Europe leading to rocketing natural gas and power prices has also very adversely affected energy prices in the UK with the UK’s benchmark gas prices quintupling since January 2021 from £54 per therm to £245 per therm in December 2021.

    Britain imports a large proportion of its gas supplies from Europe who, in turn, relies on Russia for almost 40% of its own natural gas flows. So when tension between the EU and Russia escalates, the UK is also affected. In a nutshell, when Europe sneezes, the UK catches cold.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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