We can’t speculate about where markets are going or where they will be in 3 months, despite the questions that our clients ask us all the time.

We can give you a sense for why we think there has been more volatility in power and gas markets over the past several months. We can also provide you with some perspective from experts about fundamental facts about gas and power.

Let’s start with why we see an increase in volatility, and some history here…

• As we reported just after the Polar Vortex of 2014, we have seen a major shift in market dynamics over the past several years. In the Northeast, supply costs in the Winter resemble prices that customers had grown accustomed to paying in this market during the Summer Peak Demand months of July and August. While the system peaks (in terms of demand) in Summer, the highest cost months continue to be in January and February.

• That information suggests that the Northeast does not have a problem meeting peak demand. In fact, the challenge the Northeast faces is a distribution problem (i.e. getting natural gas to the peaking plants that use gas), not one merely driven by periods of peak demand for power. As Bloomberg reported in a recent article:

Competition for pipeline access into New England is poised to intensify as the power grid, already getting more than half of its supply from gas, becomes even more reliant on the fuel as coal-fired plants shut. Opposition from environmental and consumer groups threatens to delay and derail new lines, including a $3 billion Spectra Energy Corp. project.

• So what is it that will drive this market dynamic and, consequently, the prices that customers pay, up or down? Most experts believe that weather (specifically heating degree days – HDD) is the key determinant of price increases and volatility. Take a look at a recent article from Seeking Alpha in which a risk manager, the author of the post, ran a regression analysis using 3 independent variables: deviation from normal heating degree days (HDD), deviation from normal cooling degree days (CDD), and lagged prices. His research concluded that deviations from normal heating and cooling degree days explain monthly percentage pricing changes.

As for perspective?

1. Natural gas continues to set the marginal cost of electricity in the Northeast, now more than ever.
2. Natural gas continues to be abundant in the US, particularly in the Northeast.
3. As we approach the heating season, natural gas storage levels are at record highs.
4. Constraints are largely due to infrastructure limitations, particularly into New York (as you can see in FERC’s recently-published market analysis) and into New England.

What can you do as an energy or finance professional?

The answer is, it depends. If you have any exposure to an index rate or variable energy prices, let us know. There are some actions you may be able to take that can reduce your exposure to price volatility.

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Bottom line for finance professionals, facilities and energy managers: The news on Winter costs and pricing is mixed. New York and New England are likely to continue to be the highest cost markets in the US, largely due to infrastructure constraints. Supply, storage numbers and weather may temper the price and cost pressures that the region will experience due to limited pipeline capacity.