Q2 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 include 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 Q2 Outlook

We are hoping for a stable energy production curve to bring market stability and avoid disastrous summer price spikes like the ones we experienced last year and the year before.

As the United States and Europe slowly but surely exit the restrictions related to COVID-19, the demand for energy sources has increased. The pandemic is not over by any stretch of the imagination, as evidenced by recent devastating events in India, but the light at the end of the tunnel has gotten a little brighter. This past winter’s February frost heavily impacted the Southwestern states, especially Texas. Natural gas prices and in turn electric prices skyrocketed while the state’s electric grid was critically challenged. The natural gas storage injection season was off to a fast start on April 1, but it has slowed down substantially since then. The week of May 6 showed an injection of only 60 Bcf, 29% below the five-year average.

Natural Gas Storage

Storage Surplus Continues to Shrink

Natural Gas Chart

The Energy Information Administration’s (EIA) “Natural Gas Storage Report” shows working gas in storage was 1,958 Bcf as of Friday, April 30, 2021, according to EIA estimates. This represents a net increase of 60 Bcf from the previous week. Stocks were 345 Bcf lower than last year same period and 61 Bcf below the five-year average of 2,019 Bcf. At 1,958 Bcf, total working gas is within the five-year historical range.

Natural Gas Storage Levels (Bcf)
Current Storage Level 1,958
Storage – One Year Ago 1,613
5-Year Average Level 2,019

As with every year, the traditional storage injection season started on April 1 and will continue through October 31. This season started with two very strong injections but fizzled over the last two injections to come out well below the five-year average. Last October, we finished the injection season at almost an all-time high. Since then, we’ve seen the deficit increase, with the last two injections adding to the issue. Because it’s so early in the season, this deficit might not be worrisome except for the fact that for the same period last year storage levels were over 20% higher than the five-year average. Last summer, we had more gas in storage than this year’s expected volume, yet we still had price spikes during high-demand periods. As the economy is trying to dig itself out of the pandemic induced recession and the markets are opening, demand for natural gas will increase. Unless we have production match demand, we will have pricing volatility with spikes during high-demand periods. EIA is projecting storage volumes to remain below the five-year average for the foreseeable future.

Natural gas production has averaged about 0.2 billion cubic feet per day (Bcf/d) higher so far in May vs. April, but we are still well below November 2019’s monthly record of 95.4 Bcf/d. The EIA is forecasting that production for 2021 will average just about even with the volumes seen in 2020. The natural gas rigs reached a one-year high of 96, adding 2 this past week. Their count is still down 11% from pre-pandemic levels seen in early March 2020, but they have climbed sharply from a deficit of as much as 42% seen in mid-July 2020.

While natural gas production has steadily increased over the last six to nine months, the prospect of a challenging summer, steady but not heavily increasing production, strong internal demand, and even stronger export demand all support higher prices.

US LNG exports continue to be in high demand in both Europe and Asia. This past winter was demanding in those regions and storage inventories were strongly depleted. The refill of the storage inventories is of utmost importance for these regions keeping a very high demand for LNG exporters.

Weather Forecast

Summer Is Coming in Hot!

Temperature Outlook

Source: Weather.com

Summer 2021 is expected to be hot across much of the nation, particularly in the western and central United States, according to the latest three-month outlook from The Weather Company, an IBM Business. Another top 10 hot summer is likely in the works.

A hotter than average June through August is expected from the West Coast to the Mississippi Valley and western Great Lakes. The northern and central Rockies into the northern and central Plains have the best chance for a hot summer. Meanwhile, much of the East and Southeast are expected to be near or slightly warmer than average this summer.

La Niña, the periodic cooling of water in the eastern equatorial Pacific Ocean that influences weather patterns near the US and elsewhere, reached a peak in late fall, and it has been gradually weakening this spring. Past summers in similar situations have been quite warm.

Four of the 15 summers with weakening La Niña conditions, 2006, 2011, 2012 and 2018, were among the top 10 hottest summers on record in the US. Last summer was the nation’s fourth-hottest summer dating back to 1895.

The hurricane season risks along the Gulf of Mexico and Eastern Coastal areas are high again this year. Another active season appears to be in our forecast but may not be as active as last year. Further guidance for the upcoming hurricane season will be publicly available soon.

Another significant factor in this summer’s long-range forecasting is soil moisture. As of early March, over 46% of the contiguous US was classified as being in drought, according to the Drought Monitor analysis. This is the most expansive drought area as of early March recorded in the last 10 years.

Drought Monitor

The Drought Monitor analysis as of March 2, 2021, showed much of the western half of the nation in at least moderate drought. Extreme to exceptional drought was analyzed over much of the Southwest. (USDA, NDMC, NOAA)

Furthermore, NOAA’s long-range forecasts are calling for below-average precipitation in the Southwest and Plains at least through May, and the current drought is predicted to persist, expand and worsen in the Southern Plains. Dry soil warms up a lot faster and in turn heats the air above it more efficiently than wet soil, leading to higher overall temperatures.

Another reason for the hotter than average temperatures is overall climate change. A study by Climate Central found the nation’s summer average temperatures warmed by about 2 degrees from 1970 through 2018.

Temperature Trend

Summer temperatures in the U.S. since 1970 have trended higher by about 2 degrees since 1970. Source: Climate Central

The availability of air conditioning means that the public over the last 50-60 years has also contributed to a cooling demand increase of approximately 20%.

The combination of a weakening La Niña, the drought conditions, the warmer climate model forecasts, and the long-term trends all point to a hot summer ahead.

Energy Pricing Fundamentals

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

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.

The US economy experienced its largest contraction in 74 years by dropping 3.5% in 2020. Fortunately, the first quarter GDP for 2021 increased by 6.4% but it was still below market expectations. Except for the market burst during 2020Q3, marked by the re-opening of the economy, this was the second-fastest growth pace since 2003Q2. Several factors contributed to this pace, including increased consumer spending, a rise in household income marked by the stimulus checks and the light at the end of the tunnel with regard to the global fight against COVID-19. The Bureau of Economic Research still has not declared an end to the recession; we are still in recovery mode because the GDP in total dollars has not surpassed its previous peak.

Energy Price Graph

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 continues to show strength. LNG exports are showing high strength. Production remains low compared to pre-COVID levels with low recent storage injections. Early hot summer weather forecasts are not helping much either.

Currently, 12-month strip futures pricing is at $2.964 per MMBtu (unloaded). The average price for 2020 was barely above $2.00. Monthly settlement prices so far in 2021 have not seen figures below $2.50 per MMBtu. The May 2021 settlement price of nearly $3.00 was above those of May of 2019 and 2020.

Natural Gas Graph

With our last quarter update, West Texas crude oil prices were averaging just above $54 per barrel for a 12-month strip, a far cry from the lows experienced back in April of 2020. Expectations of swift economic recovery, continued supply cuts by OPEC and partner countries, and multiple geopolitical factors are contributing greatly to upward pricing pressure for oil products. We are currently seeing WTI pricing at just above $65 per barrel. Global inventories will continue to fall; any type of market disturbance will push the market higher.

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 lows and the hot summer forecast are the major factors for the foreseeable future.

The weekly forward power price update is as follows:

Pricing Chart

Energy Outlook

Electricity Consumption (source EIA)

EIA forecasts total US electricity consumption will increase by 1.5% in 2021 and by 1.7% in 2022. COVID-19 pandemic guidelines and restrictions have started to weaken with higher economic activity expected in restaurant and retail store business. Residential electricity consumption has risen because people are staying home for longer periods during the day and because many are still working from home. We expect a gradual return to the office space, yet not to that of pre-COVID levels.

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 was more than the same period last year because of colder weather in the United States, especially with the February 2021 polar blast. 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.

Continued improvement in economic conditions will 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 forecasts that retail sales of electricity to the industrial sector will increase by 1.1%.

Electricity Generation (source EIA)

EIA projects an increase of 1.2% in the US power generation sector during 2021 compared to 2020. There is also an additional increase forecast of 1.5% in 2022. The share of US electric 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 40% in 2020. Reduced generation from coal-fired power plants has offset this increase. Coal supplied 46% of US generation in 2010, compared with an estimated 20% in 2020. Much of this change in the generation mix has been the result of sustained low prices for natural gas and an increase in renewable sources.

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. It is forecast that average US delivered natural gas prices will rise by an additional 8.9% in 2022.

The expected volatility 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 US 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 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 will 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 cent 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 of 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 2021 wholesale electricity prices in many areas of the country will be higher than those of last year, reflecting the increased cost of natural gas for power generation. EIA forecasts that annual average wholesale prices in New England will rise substantially this year primarily because of the colder winter weather that contributed to rising natural gas prices.

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 are projected to increase by an additional 1.2% in 2022.

Bottom Line

Long-Term Natural Gas Prices Are Rising

Buy! Multi-year gas and electricity contracts remain relatively affordable 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 upcoming temperature rises during our summer months, COVID-19 vaccination results and re-opening of the main consumer markets over the next few months would provide plenty of influence for energy pricing. Work with your trusted broker on long-term pricing strategies to avoid market volatility and ensure budget certainty.

WHAT HAPPENS TO OUR BUDGET?

What happens to our budget if natural gas prices spike this winter or electricity prices spike this summer?

WHAT IS OUR RISK MANAGEMENT?

What is our risk management policy to protect the business against energy price volatility?

WHAT IS OUR RISK TOLERANCE?

Do we want budget certainty with fixed prices or do we want current market prices and the associated risk of cost fluctuations?

Current Administration to Finance $8 Billion in Electric Grid Improvements (Source: Americans for a Clean Energy Grid)

The Biden administration on April 27 announced new steps that the US Department of Energy and Department of Transportation are taking to upgrade the nation’s electric grid. The President’s goal of decarbonizing the nation’s power supply by 2035 takes into consideration that the national transmission lines must be upgraded and expanded.

First, the DOE will open the Western area Transmission Infrastructure Program’s $3.25 billion fund to applications for transmission projects to “unlock renewable energy in the West.“ And second, the DOE’s loan programs office will start accepting applications for up to $5 billion in loan guarantees to support innovative transmission projects as well as transmission projects owned by federally recognized tribes or the Alaska Native Corp.

Along with the DOE’s actions, the DOT issued new guidance to help state transportation departments consider allowing transmission lines, renewable energy projects and electric vehicle charging stations to be built along highway rights-of-way.

Also on April 27, Americans for a Clean Energy Grid released a report identifying 22 potential projects that could boost the nation’s wind and solar generation by nearly 50% if “more workable” transmission policies are enacted.

While the 22 projects in the report could potentially add about 17 million MW-miles of transmission capacity, potentially boosting nationwide transfer capacity by as much as 11%-12%, ACEG noted that still represents only a fraction of what is needed.

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