Highlights from FERC’s 2015 State of the Markets Report

As part of its energy market oversight responsibilities, the Federal Energy Regulatory Commission (FERC) annually publishes its “state of the markets” report.  In mid-March, FERC released its 2015 market report focusing on electricity and natural gas market activity. Below are just some of the takeaways from the report.

2015 Highlights

• Increased natural gas supplies led to lower gas and electricity prices, but created stress for oil and gas producers and pipeline companies.
  • In spite of low prices, production in the Marcellus and Utica formations reached record levels in 2015.
• Natural gas power generation exceeded coal-fired generation in seven months of 2015.
• Distributed energy resources continue to grow in capacity and energy markets, with renewable energy generation setting records nationwide (particularly in California and MISO).
• Capacity markets in PJM and New England became larger revenue sources with generation mixes continuing to change.

Natural Gas Market

• Demand: Overall natural gas demand rose 1.3 percent from 2014.  This was driven by a 3.8 percent demand increase from the power sector, while demand in the industrial sector dropped slightly and residential/commercial demand dropped by 2 percent (some of this demand drop was due to the warm 2015-2016 winter).
  • LNG exports present an uncertain, but potentially significant driver for future demand growth.  Staff estimates that exports could reach 8.5 Bcfd by 2020.
• Production: Natural gas production hit a new record of 72.6 Bcf in 2015, but FERC believes there are signals that production has plateaued and may begin to decline.  Gas storage also reached record level of 4 Tcf, further pressuring prices downward.
• Prices and Trading: Spot prices for natural gas dropped substantially across the U.S., with average price drops at major hubs falling 30 – 46 percent compared to 2014. Prices for natural gas futures contracts dropped 27 percent in 2015, mostly due to increased supply from the Appalachian Basin. Commodities trading revenues at the world’s twelve largest banks declined 18 percent relative to 2014.
• Transport: Insufficient pipeline takeaway capacity in Ohio, Pennsylvania and West Virginia led to local gas surpluses and decreased prices for producers.  Whereas pipeline constraints at hubs in Boston (Algonquin), Maryland/Virginia (Transco 5) and New York (Transco 6) resulted in higher prices for consumers, though still below 2014 levels.
• Connection to Oil Markets: Though oil companies are not under FERC jurisdiction, the 66 percent price drop in crude oil from June 2014 to December 2015 has impacts on natural gas markets.
  • About one sixth of U.S. natural gas is co-produced with oil, so a decline in oil production can lead to a decline in gas production.
  • The price of most LNG long-term contracts is indexed to oil, potentially limiting prospects for LNG exports to create gas demand growth while oil prices are low.
  • Many companies produce both oil and gas.  Low oil prices have stressed company balance sheets, leading to credit defaults, consolidation, and lay-offs.  Failure of these companies can put stress on mid-stream gas companies that depend on long-term contracts to finance pipeline development.

Electricity Markets

• Demand: Overall electricity demand fell by 1.1 percent, owing to decreased demand in the industrial sector and flat demand in the residential and commercial sectors.
• Supply:
  • SPP expansion: The Southwest Power Pool’s expansion that incorporated new service territories resulted in a 7.6 GW capacity increase, threefold increase in hydroelectric capacity, and considerable reductions in average LMPs reflective of national declines in wholesale prices.
  • Distributed Energy: Total electricity sold back to utilities by net metered customers on average increased by 500 percent from 2011 through 2015, while net generation from power plants increased on average by 1.2 percent over the same time.
  • Renewable Energy: From 2013-2015, wind generation rose from 4.1 to 4.6 percent of total generation from utility-scale facilities, while overall solar generation rose from 0.66 percent to one percent of generation between 2014-2015. California hosts about half of the nation’s installed utility-scale solar capacity (6 GW). With 15 GW of wind installed, MISO is expected to host over 17 GW of wind capacity by the beginning of 2017.
• Prices: Monthly average, on-peak wholesale electricity prices at major trading hubs across the nation dropped 27 – 35 percent, compared to 2014.  This was mostly due to low natural gas prices driving down marginal clearing prices. PJM and ISO-New England saw energy market price drops of 6 and 25 percent (from 2013-2015), respectively, coupled with increases in capacity market prices of 152.6 and 200 percent, respectively.  Both of these markets instituted capacity market reforms in 2015.

Christina Simeone

Kleinman Center Senior Fellow

Christina Simeone is a senior fellow at the Kleinman Center for Energy Policy and a doctoral student in advanced energy systems at the Colorado School of Mines and the National Renewable Energy Laboratory, a joint program.