US natural gas prices could ease in 2023, potentially lowering northeast power prices: EIA

US Energy Information Administration analysts discussed the relationship between fuel costs and power prices, and how recent US LNG export growth has created uncertainty about energy supply, with the New York Independent System Operator in a podcast released Aug. 10.

"What we are seeing with retail electricity rates is some of the higher growth rates that we've seen in a number of years with this especially concentrated in the northeast and New England for sure," Tyler Hodge, senior economist in the EIA's Office of Energy Analysis, said during the NYISO Power Trends Podcast.

So far this year, the residential electricity rates in the Mid-Atlantic region, which includes New York, have been up about 9% and that is close to what EIA is projecting for the whole year, he said, adding that includes the commercial and industrial sectors as well.

The main driver of the power price increase has been fuel costs, and especially natural gas prices, which have gone up significantly compared to recent years, Hodge said.

Natural gas made up 47% of NYISO's power generation stack in 2021 and is expected to grow slightly to 50% for 2022, according to S&P Global Commodity Insights' latest North American Electricity Five-year Forecast.

"We've seen recently that growth in US demand for natural gas has been outpacing the growth in supply," Corrina Ricker, a certified data scientist on the EIA's natural gas markets team, said.

This has led to inventory levels that are below their five-year average. Big contributors to the strong demand growth are high levels of US LNG exports and strong domestic demand for natural gas consumption that has been higher than average in recent months, Ricker said.

At the same time, gas production growth has been relatively flat and has not kept pace with demand growth, she said, adding that lower inventory levels have led to higher gas prices.

With regard to the impact of the pandemic, there has been a recovery in gas production from pandemic lows, but there has also been "capital constraint" from some producers, Ricker said.

LNG exports

In 2023, most of EIA's models are showing domestic gas production picking up while LNG export growth starts to slow down with inventories beginning to build faster than average around the spring of 2023, she said. This should help lower gas prices.

"So, for the full year of 2023 we are expecting gas prices to be about $4.76/MMBtu compared to where they are now, and where we are expecting them to be for the second half of 2022 which is just under $6/MMBtu," Ricker said.

EIA considers LNG exports a source of US gas demand and there has been a lot of export capacity growth in recent years with high utilization rates helping create tightness in the market, Ricker said.

And the tighter supply-demand balance in the gas market that has pushed up gas prices has been felt by power producers in New York who are paying higher prices for fuel and thus contributing to higher power prices, Kevin Lanahan, NYISO vice president of external affairs and corporate communications, said.

For the NYISO Hudson Valley Zone G, EIA forecasts that for 2022 the wholesale power price will be around $83/MWh and that would be about 80% higher than the 2021 annual average with that mostly reflective of the fuel cost increase, Hodge said.

Asked if higher gas prices could incentivize building out more renewable energy capacity, Hodge said it was difficult to answer because such decisions are made over a long term, but a sustained period of higher gas prices could make it less expensive to build renewable energy projects and one could make that argument.

"I think the main driver in the growth of renewables is not just economics but there are also policy-driven incentives that encourage increases in renewables which is another factor that can make the comparison about which fuel is cheaper in the long run a little bit more messy," he said.