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Biggest U.S. Gas Rally in 16 Years Leaves Electricity Behind

Wholesale electricity prices in the U.S., which used to take their cue from natural gas, are in the doldrums.

While gas has just capped its best second-quarter performance since 2000, power has failed to keep up. Spot prices for the benchmark Western hub at PJM Interconnection LLC, the nation’s biggest grid, averaged $27.15 a megawatt hour in the first six months of the year, 34 percent below the year-earlier level.

“The underlying demand for power, the economic-related demand, is continuing to be very weak, maybe declining in a lot of regions,” Kit Konolige, an analyst at Bloomberg Intelligence, said Thursday by phone. “That makes a significant difference.”

As economic uncertainty limits power demand, other factors are also capping consumption. A new wave of efficient gas plants is replacing aging generators, while competition from renewable energy and nuclear reactors with fixed fuel costs helps keeps prices low. “They push down the price of power relative to the price of natural gas,” Konolige said.

Hedging by power producers -- locking in sales as soon as they see favorable margins over gas -- also is holding down the price, Praful Mehta, an analyst at Citigroup Inc. in New York, said by phone. 

The drag could lift in 2018 as gas-price hedges for many generators expire, he said. Already, 2018 power prices in Texas have begun rising along with gas prices for that year, according to Konolige.

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