Higher Natural Gas Prices Push Up U.S. Wholesale Electricity Prices

Rising fuel costs, especially those of natural gas, drove up wholesale electricity prices in all U.S. regions in 2021, the Energy Information Administration (EIA) said in an analysis on Friday.

Average wholesale prices for electricity at all major trading hubs in the United States were higher in 2021 than in 2020 as a result of the rising costs of the fuels used for power generation. Natural gas accounts for the single largest share of U.S. electricity generation and represented 40 percent of the fuel used for power in 2020.

“The cost of natural gas is a significant driver of electricity prices because it often acts as the marginal (highest cost) fuel of generating units that operators dispatch to supply electricity,” the EIA said.

Apart from generally higher natural gas prices in 2021 compared to 2020, the Texas Freeze in February 2021 also led to spikes in regional wholesale electricity prices in several regions during and after the winter storm.

Before 2021, U.S. natural gas prices were relatively low thanks to abundant supply. The cost of natural gas delivered to electric generators averaged $2.40 per million British thermal units (MMBtu) in 2020. But in 2021, rising demand amid a muted supply response led to higher natural gas prices and the delivered cost of natural gas to electricity generators jumped from $3.19/MMBtu in January 2021 to an estimated $5.04/MMBtu in the fourth quarter of 2021, the EIA said.

Due to the high natural gas prices, all regions saw higher wholesale electricity prices in 2021.

For example, average electricity prices during the second half of 2021 averaged $45/MWh at the Illinois hub in the Midcontinent ISO market, up by a massive 97 percent from the second half of 2020. Average electricity prices at the SP15 hub in the California CAISO market was $61/MWh in the second half of 2021, up by 37 percent compared to the same period of 2020, the EIA has estimated.

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