The main culprit behind any recent electricity price increase is a wholesale term called “heat rates.” Heat rates are used in the energy industry to determine how efficiently a generator uses heat energy. Generally, natural gas prices and heat rates have an inverse relationship. If natural gas goes up, heat rates go down and vice versa.
The Cost of Electricity = Natural Gas x Heat Rate
Last summer gas prices were around $4 and electricity was around $50/mWh (5 cents/kWh). This means heat rates were at about $12.50. Although gas prices remained steady, during the 4 days in August when demand and threats for blackouts were high, the heat rate was about $91.25; making electricity about 36.5 cents a kWh.
Natural gas prices have stayed relatively stable and are expected to stay that way. However, heat rates began increasing due to tighter reserve margins and the price of electricity was reflecting this fact (Read More). Electricity prices were running a few mils (1 mil – $0.001) higher per kWh in March, April and early May. Refer to the chart below to see the price climb beginning in March and the pullback in mid-May.
Above chart courtesy of MP2 Energy.
Due to mild weather forecasts for this summer, we have seen a pullback in heat rate prices which is bringing electricity prices back down. Also attributing to this price decrease is the announcement of a 500MW generation expansion coming online as soon as next summer. Now is a good time to lock in any electricity contracts before heat rates begin climbing back up on tight reserves or extreme weather.