Q1 2021

The RealPage® Energy Outlook

About the Energy Outlook

Get the details on pricing trends, weather, storage levels, tariffs and more.

The Energy Outlook is designed to inform you about the current state of the natural gas and electric energy markets. While prices are most important, we offer insights into the drivers of the energy markets and shed some light on how these drivers impact market prices. The primary energy market drivers fall into two areas: Fundamentals and Politics.

  • Fundamentals are the factors influencing energy supply and demand of electricity and natural gas. Supply factors include power generation, natural gas production (drilling rigs, fracking, and horizontal boring), underground gas storage, and pipeline capacity. Demand factors include consumer usage and weather (driving how much energy is required for heating and air conditioning seasons).
  • Politics include changes to the legal and regulatory environment that can cause major moves in energy prices. Political impacts can be new emission standards, such as mandated movement to cleaner generation facilities with higher operating costs, new energy taxes or fees, and restrictions on new pipeline or transmission line placement. Political factors can be domestic or international.

2021 Q1 Energy Outlook

We Are Officially in an Under-Supplied Market—Five-Year Natural Gas Storage Average Remains Elevated, but the Surplus is Shrinking

We’ve had a very interesting and eventful start to our winter season. The elections are over, the Holidays are past, COVID-19 is still wreaking havoc—but the good news is the vaccines are here. The winter weather so far from November through January was very mild, but recent weeks brought large snowstorms across the country and the first Polar Vortex in a while. Natural gas futures recently jumped above $3.00 per dekatherm as a major snowstorm battered the entire northern part of the country. We expect additional price spikes following the most recent forecasts for well-below-normal temperatures during February.

Natural Gas Storage

Storage Surplus Continues to Shrink

Natural Gas Chart

The Energy Information Administration (EIA) “Natural Gas Storage Report” shows working gas in storage was 2,881 as of Friday, January 22, 2021, according to EIA estimates. This represents a net decrease of 128 BCF from the previous week. Stocks were 78 BCF higher than last year same period and 244 BCF above the five-year average of 2,637 BCF. At 2,881, total working gas is within the five-year historical range.

Natural Gas Storage Levels (Bcf)
Current Storage Level 2,881
Storage – One Year Ago 2,803
5-Year Average Level 2,637
Natural Gas Chart

The traditional injection season ended in October at an almost all-time high storage. Since then we have seen the year-over-year and five-year average surpluses constantly narrowing despite the mild weather so far. The draws this heating season have outpaced the five-year average and are now projected to end March 2021 at 1.6 TCF, an 11% deficit to the prior five-year average. This is a direct result of the lower rig count and related production.

In September we were sitting on a low 74 natural gas rig count and 189 oil-directed rig count. The recent rally in both natural gas and oil prices has incentivized for higher drilling activity and we ended January with 88 natural gas rigs and 295 oil-directed rigs. Forecasts for higher natural gas prices have offered the industry a very strong incentive for additional production, but the new administration has already initiated regulations on new leases and permitting. Another piece to the puzzle is the industrial natural gas consumption. It has recovered to pre-COVID levels—in the final months of 2020 it was at the highest levels of the last 20 years. The EIA projects an average daily dry gas production of 88 BCF during 2021, this figure is off by over 6 BCF per day compared to 2019 averages. If the remainder of the heating season is met by continuing super snowstorms and polar vortexes, we could be in trouble for the summer season and beyond.

Weather Forecast

Winter Is Not Done With Us Yet!

The top graph shows us what we already know: For December and January our weather was dominated by a very mild Pacific flow, associated with a moderate La Niña. Our neighbors in the North experienced a very warm trend, more than five degrees above normal. January 2021 officially ranked as the 11th warmest on record. Snowstorms in the Northwest provided a very healthy snowpack with short-term drought relief for California.

And then came February in all its glory. We saw a pattern change across North America bringing much colder air introducing widespread snowstorms. The first 3 weeks of February reminded us what winter weather feels like, and the graph below shows what to expect as a result.

NOAA Heat Map NOAA Heat Map

Energy Prices

Near-Term Prices Are Slightly Up – Long-Term Prices Are Flat

The Energy Outlook mainly focuses on natural gas prices because they tend to lead electricity prices. As natural gas prices increase or decrease, electricity prices often follow suit— but hours, days or weeks later. Also, natural gas has a national price established on the NYMEX. Other regional prices and markets exist but are compared with the NYMEX prices. Electricity is different because the U.S. is divided into six regional markets, each setting its own price and having its unique market rules. All six regions tend to move in the same direction, but price volatility and generation vary considerably between regions.

Natural Gas 12-month strip prices continued to increase over the last quarter. Higher natural gas-fired electric generation has kept demand up. Industrial use has surpassed pre-COVID levels. LNG exports are showing increased expectations in the fall. Production remains low compared to prior year.

Currently 12-month strip pricing is at $2.94 per MMBtu. The average price for 2020 was barely above $2.00. Monthly settlement prices for November and December came close to $3.00 for the first time since February 2019.

Energy Price Graph

With our last quarter update, West Texas crude oil prices were hovering around $41 per barrel. For the next 12 months, pricing is averaging at the $54 per barrel price—a far cry from the teens we experienced back in April of 2020. Expectations of swift economic recovery and supply cuts by OPEC and partner countries are contributing greatly in upward pricing pressure for oil products. EIA forecasts that global inventories will continue to fall, drawing at a rate of 0.6 million barrels per day in 2021. This upward price pressure was further magnified by the January 5 announcement by Saudi Arabia that it would unilaterally cut an additional 1.0 million barrels per day of crude oil production in February and March.

The US economy contracted by 3.5% in 2020, the largest contraction in 74 years. We do have some good news from the Congressional Budget Office stating that recovery is expected in a more rapid rate than previously expected. But it will take several years for the output to reach pre-COVID levels and several factors will affect this recovery inclusive of the vaccination rates.

Energy Price Graph

Regional Electricity Outlook

Electricity markets are complex, with many regional markets. The regional markets may differ from the overall continental energy outlook. COVID-19 news, natural gas production reductions and the current cold spell are the major factors for the foreseeable future.

Electricity Consumption (source EIA)

EIA forecasts total US electricity consumption will increase by 1.5% in 2021 and by 1.7% in 2022. Social distancing guidelines related to the COVID-19 pandemic and restrictions on some economic activity, such as limits on the number of customers in restaurants and retail stores, have affected electricity consumption patterns over the past year. Residential electricity consumption has risen because people are staying home for longer periods during the day and because many are working from home. In contrast, electricity consumption in the commercial and industrial sectors has fallen.

During the spring of 2020, retail sales of electricity to the residential sector were about 9% higher than the typical heating and cooling demand given the temperatures at that time. This effect appears to have moderated somewhat in recent months, averaging about 4% above typical consumption since July. EIA expects the effect of increased residential electricity usage to gradually decline through the first half of 2021. In addition, electricity usage for heating during the first quarter of 2021 will likely be more than the same period last year because of colder weather in the United States, with 11% more heating degree days. Annual residential electricity retail sales increased by 1.3% in 2020 and are forecast to grow by 2.4% in 2021 and by 1.6% in 2022.

Electricity consumption in the commercial sector during 2020 was down by an estimated 6.0% compared to 2019. EIA expects commercial activity to increase in 2021 with non-farm employment rising by 2.8%. However, some of the changes in working patterns may continue in the long term, reducing the need for electricity use at office buildings. EIA forecasts commercial sector retail electricity sales will grow by 0.9% in 2021 and by 1.8% in 2022.

Improving economic conditions will also likely increase electricity demand in the industrial sector. EIA forecasts that industrial production by electricity-intensive industries will increase by 2.9% in 2021 after declining 6.9% in 2020. This expected increase in industrial production contributes to EIA’s forecast that retail sales of electricity to the industrial sector will rise by 1.2% in 2021. In 2022, EIA forecast retail sales of electricity to the industrial sector will increase by 1.1%.

Electricity Generation (source EIA)

EIA expects 1.2% more power generation in the US power sector during 2021 than in 2020. The electric power sector generation in the forecast grows by an additional 1.5% in 2022. The share of US electricity generation supplied by natural gas-fired power plants has increased significantly during the past decade, rising from 23% of total generation in 2010 to an estimated 39% in 2020. Reduced generation from coal-fired power plants has offset this increase. Coal supplied 46% of U.S. generation in 2010, compared with an estimated 20% in 2019. Much of this change in the generation mix has been the result of sustained low prices for natural gas.

The cost of natural gas delivered to electric power generators was often below $3.00/MMBtu during the past two years. During 2020, the US cost of delivered natural gas averaged an estimated $2.37/MMBtu, which would be the lowest price in nominal dollars since 1995. EIA forecasts the average cost of natural gas for electricity generation to rise by 41% to an average of $3.35/MMBtu in 2021, which is about the same price as in 2017. Forecast average US delivered natural gas prices rise by an additional 8.9% in 2022.

These expected changes in the costs of fuels used for generating power will likely affect the use of coal and natural gas for electricity generation. EIA forecasts that the natural gas-fired share of total U.S. generation will decline to 36% in 2021 and 34% in 2022, which would be about the same natural gas share as in 2018. The expected rise in natural gas fuel costs make coal more economic for electricity generation, with EIA’s forecast share of generation from coal-fired power plants rising to 22% in 2021 and 24% in 2022. However, these shares of coal generation would still be the second- and third-lowest share in history after the 20% share in 2020.

EIA expects the share of generation from renewable sources will increase from 20% in 2020 to 21% in 2021 and to 23% in 2022. Within the renewables’ category, hydropower generally averages about 7% of total generation, and EIA forecasts that it will be about that share in 2021 and in 2022. In the forecast, the share of total generation for renewables other than hydropower, which was 12% in 2020, will rise to 14% in 2021 and to 16% in 2022.

According to the latest information, six nuclear reactors are scheduled to retire in either 2021 or 2022, and two are scheduled to come online. The forecast nuclear share of total electricity generation, which averaged nearly 21% in 2020 will fall to 20% by 2021 and to 19% in 2022, consistent with upcoming retirements.

Renewable Capacity (source EIA)

Over the next two years, renewable generating capacity will continue to grow. Wind capacity growth begins to moderate, but solar capacity growth continues. In 2021, large-scale solar capacity growth in gigawatts (GW) exceeds wind growth for the first time. EIA forecasts that 15 GW of solar photovoltaic (PV) generating capacity will be added in 2021, with an additional 12 GW forecasted for 2022. Small-scale solar PV capacity is forecasted to increase by 4 GW in 2021, with another 3 GW forecasted for 2022. Residential PV accounts for most of this additional small-scale generating capacity for both 2021 and 2022. EIA’s forecast solar capacity growth reflects various state and federal policies to support renewable energy.

Tariffs on PV modules decline to 15% in 2021 and expire thereafter. Growth in PV generating capacity over the STEO forecast reflects, in large part, declining global prices for PV modules and increasing prices for natural gas. This anticipated fall in module price is expected to outweigh price increases incurred by the tariff in 2021.

Generating capacity from wind turbines is forecasted to grow by 12 GW in 2021, with an additional 4GW of growth expected for 2022. This growth in forecasted wind generating capacity for 2021 and 2022 marks a decline from the record of 21 GW added in 2020. Because wind capacity is often added at the end of the calendar year, increases in generation frequently lag increases in capacity for the year they occur in, and they are reflected in the generation for the next year.

Much of this slowing growth in wind can be attributed to the expiration of the production tax credit. The credit, which at the end of 2019 was extended through 2020, provided a 2.5 cents per kWh benefit for facilities entering service or securing 5% safe harboring (spending at least 5% of total estimated project cost) through the 2020 calendar year. The effect of the tax credit extension included in the Consolidated Appropriation Act, 2021, enacted in late-December 2020, is not yet reflected in this forecast. EIA will update its data and forecasts as new information is reported on the EIA-860 survey of planned capacity additions.

Electricity Prices

EIA expects wholesale electricity prices in many areas of the country in 2021 will be higher than last year, reflecting the increased cost of natural gas for power generation. EIA forecasts that annual average wholesale prices in New England will rise 43% this year primarily as a result of expected colder winter weather that contributes to rising natural gas prices. However, in California, forecast wholesale electricity prices in 2021 average 8.1% lower than last year, primarily reflecting fewer spikes in prices related to hot summer weather as happened in 2020.

EIA forecasts the U.S. retail electricity price for the residential sector will average 13.3 cents/kWh in 2021, which is 1.2% higher than the average retail price in 2020. Forecast residential prices increase by an additional 1.2% in 2022.

Bottom Line

Long-Term Natural Gas Prices Remain Relatively Low

Buy! Multi-year gas and electricity contracts remain relatively low but with an upward pressure. Both the natural gas and electric market prices have been volatile within a narrow range. The forecasted drop in natural gas production, the temperature plunge during the February Polar Vortex, the new administration policies and the COVID-19 vaccination results over the next few months would provide plenty of influence for energy pricing. Work with your trusted broker on long-term pricing strategies in order to avoid market volatility and ensure some budget certainty.


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