Ontario Electricity Market Commentary – January 2014
January marked the return of rollercoaster-style volatility in the Ontario electricity market, and what a wild ride it was. January’s average weighted Hourly Ontario Electricity Price cleared 6.5cents/kWh for the month, well over analyst predictions for the period and more than twice the average price in January 2013.
So why was electricity so expensive in the month of January? Let’s explore some of the key factors that drove our rates up.
Electricity Prices in Ontario started off strong in the first weeks and only gained momentum through the month, settling at an eye popping average weighted 6.55cents/kWh.
Milli Vanilli liked to blame it on the rain, but in the case of January’s HOEP we can blame part of it on a little phenomenon called The Polar Vortex. Much of the northeast experienced cold temperatures for a prolonged period of time in mid-to-late January, causing stress on the electricity grid as consumers demanded more energy to heat their homes and offices.
Natural Gas Prices
Ontario depends on natural gas generation for peak electricity demand. Natural gas prices were exceptionally expensive for much of the month as heating demand surged with the cold temperatures. Prompt-month Henry Hub contract prices sailed through high water marks and the market saw prints of over $5/mmBtu for the first time since 2010.
“Next Day” Physical Natural Gas Prices in Ontario at the Dawn Hub in Southern Ontario shot up to between $10 and $27 when the cold first hit in January and remained in that price range through the month.
Natural Gas Storage
The Dawn Hub is the largest integrated natural gas storage facility in Canada and one of the largest in North America. Historically, local natural gas distribution companies and power generating companies inject natural gas into the Dawn Storage Hub in the fall for withdrawal in the winter months. Due to the exceptionally cold winter we have been experiencing, starting with below normal temperatures in December, natural gas storage levels at Dawn have been drawn down to very low levels forcing buyers to bid up natural gas prices in the next day markets to secure gas deliveries from Alberta and the Midwest.
Natural Gas storage levels throughout North America are well below the 5 year average for this time of year. The increased reliance on natural gas in Ontario will delay the ability of natural gas storage operators to refill their storage facilities ahead of the summer months. Any further cold weather in February and March will delay that process even further, putting upward pressure on natural gas prices through 2014.
Coal Generator Phase Out
By the end of 2013, Ontario had phased out all but one of its coal fired electricity generators. While the elimination of coal generators is good for the health of Ontarians, it does place increased reliance on more expensive forms of generation, such as Natural Gas generators.
The Canadian dollar declined almost $0.05 to the surging greenback in January. A weaker Canadian dollar places upward pressure on HOEP for 2 key reasons. First, a low CAD increases demand for exports to the more expensive US markets. Second, Natural Gas purchases are made in USD, making natural gas contracts more expensive in Canadian markets with a weaker CAD. As a general rule of thumb, a movement of $0.01 in the CAD will shift HOEP by 0.03cents/kWh.
Overall, January’s high HOEP was a good reminder of how volatile Ontario’s electricity rates can be. Consumers floating on the spot market can expect their HOEP charges in January to be at least three times more expensive than the 2013 average.
With the phase out of coal generation and natural gas storage levels at historically low levels, the energy landscape in Ontario has changed and outlook is bullish for 2014.
We encourage our clients to review their risk management policies for energy purchasing in light of recent market fundamentals, and consider locking in a portion of total usage for the upcoming outage season in the spring and during peak demand periods in the summer and winter to insure against such volatility.
Should you have any questions, comments, or ideas for future blog topics, we encourage you to comment below or reach out to a member of the Bruce Power Direct team for more information.