January 2025 Electric Spike
Demand for cooling, which is primarily powered by electricity, peaks in the summer. Meanwhile, demand for heating, which is largely fueled by natural gas or another fossil fuel, tops out in the winter. So, shouldn’t basic supply and demand economics dictate that electricity prices be inexpensive in the winter? Usually not. It’s more complicated than that.
Market forces driving the two commodities are intertwined. Despite New York’s ongoing efforts to “clean” the power grid, about half of the state’s electricity is still generated by fossil fuels, principally natural gas. When we experience extreme cold, utility customers are left with no choice but to burn more and more of it to heat their buildings. However, power plants also need natural gas to create enough electricity to fuel industrial operations, keep the lights on in our homes and offices, etc.
To make matters worse, the bitter cold temperatures can cause “freeze offs”, which are when water and other liquids contained in a natural gas stream freeze, severely disrupting production. When we need it most, supply is naturally forced to dwindle. This double whammy of limited supply replenishment and elevated demand sends the market into a frenzy. The cost of natural gas rises, and power plants turn to even more expensive fuel sources to backfill the gap left by the elevated heating demand.
No matter where you live, you probably notice how brutally cold January is. This is especially true in New York City, which is suffering through its chilliest January in over a decade. A polar vortex swept over most of the country in the first half of the month, with frigid temperatures also forecasted for next week. Though natural gas in storage is approximately 6 percent above the trailing 5-year average, reserves are now very slightly lower than last year, which may also be spooking the market.
So what does this all mean for your utility bills? Over the past 5 years, NYC’s Zone J of the NYISO (New York’s wholesale power market) averaged just under $0.05 per kWh. During those winters, the commodity averaged $0.06, with only one monthly winter spike into the double digits. However, through the first two weeks of January, NYISO Zone J is averaging over $0.10. The daily average peaked at $0.18. And freezing temperatures are expected to return next week, thereby applying more upward pricing pressure. This all results in a pricey electric bill.
Though this may seem like a doomsday scenario, it is not. These events typically play out during harsh winters. It occurred most recently in 2022 and 2014, both of which thus far were more exaggerated than 2025 in terms of pricing conditions.
If you receive electric supply from the utility, expect your costs per kWh to climb. The utilities offer no price protection, and their rates may increase beyond one month. However, third-party supply contracts will offset the spike and limit the impact to the periods with the extreme weather. We recommend staying the course with an index strategy, our most commonly proposed contract type, which historically performs the best despite these infrequent spike periods. We also do not believe this is an opportunity to hedge and fix the remainder of an index contract. During weather-driven pricing anomalies, not only the prompt month but the future months inflate, negating any savings achieved by fixing right now.
Stay warm!
Market Analysis
Natural Gas
Though it is seasonally appropriate for NYMEX futures to rise during the winter when heating demand throughout the country peaks, January has been an anomaly. After a polar vortex swept over much of the U.S. in January, the commodity spiked as high as $4.25 per MMBtu. With frigid weather persisting on the horizon, expect volatility to continue for the foreseeable future.
Electricity
To summarize the topic of this newsletter, freezing temperatures cause natural gas supply to decline and demand to spike. As natural gas is the primary input to power generation in New York, NYISO Zone J ballooned to average $0.10 per kWh month-to-date, peaking at a daily average of $0.18. Expect more volatility as we progress through the winter months.
Crude Oil
Crude oil futures have already risen 8 percent in just the first half of January from $72 to $78 per barrel, amid concerns over restricted supply. Last week, the Biden administration implemented stricter sanctions targeting Russian oil. Meanwhile, investors anticipate that the Trump administration will take a firm approach in enforcing sanctions on Iran and Venezuela.
💡 Mitchell’s Tip: Know your LL97 pathway.
