Market Trends

Time-sensitivity

Unlike certain other commodities, electricity and its pricing in various areas can be extremely volatile. As electricity markets have deregulated, the price controls that characterized traditional, and in most cases cost- based, utility tariff pricing have been replaced with prices that, for the most part, represent a combination of factors. This combination defines the market price for electricity, in general, and can include time-of-day, season, location, and expected changes in the costs of fuels used by electric generators In the production of electricity.

Commoditization

Electricity is a traded commodity, much like other commodities such as oil, gold, and coffee beans. The wholesale electricity price is driven by analysts’ perspectives on the relationship between supply (how much is readily available and at what cost) and demand (how much is required now and in the future).

Analysts’ perceptions are based on their assessment of many factors that influence supply and demand. These factors include:

• Changes to prices of related commodities such as oil
• Short- and long-term weather forecasts
• International events such as natural disasters
• International politics

Price Volatility

In today’s challenging and uncertain times, the relationship between the factors that affect electricity pricing changes frequently. This in turn leads to volatility and unpredictability in the wholesale price of electricity. On a daily, or even more frequent basis, it is not unusual for prices to rise and fall significantly. As the following chart shows, energy prices have generally been more volatile than prices in other markets. In particular, electricity prices on a seasonal, peak, and around-the-clock basis have exhibited a high degree of volatility.

Regional Influences

The regional market price for electricity depends in large measure on the relevant fuel mix, or the fuels that are used to generate the electricity within any particular region. This mix is represented by the percentage of each type of fuel used to generate the electricity in that particular region. (For example, the chart shown below contains the average fuel mix throughout New England.) As a result, much of the price movement associated with electricity throughout a region is dependent on the fuel mix. In this example, those prices are dependent on the fluctuations in the price of natural gas, because its consumption accounts for more than 40% of the electricity generated.