On behalf of the team at 5, I am pleased to forward our market letter for the first quarter of 2021. This letter focuses on the latest Black Swan event, Uri, the winter storm that hit Texas in mid-February. The storm caused a catastrophic loss of generation and triggered an extended period of extremely high energy prices. This letter provides: (i) a summary and chronology of the legal and regulatory proceedings that Uri has spawned; (ii) a snapshot of how the storm has impacted a variety of market participants including municipal utilities, wind farms, renewable purchasers, commercial and industrial buyers, and the natural gas market; and (iii) an overview of legislative efforts to address electric reliability in ERCOT.

Throughout last month’s Winter Storm Uri, NYMEX Henry Hub natural gas prices increased in volatility. Multi-year highs for the prompt month contract (April) along with daily trading ranges almost as high as earlier this winter were experienced. By late February, the winter storm bulls had left the market, and the bears took over. By the middle of March, April’s contract had sold off from the closing price of $3.032/Dth on February 17th to a closing price of $2.483/Dth on March 15th.

So far, it appears as if no one is ready to make price adjustments to customer bills in the aftermath of Winter Storm Uri. Neither the Texas executive branch, the legislative branch, nor the Public Utility Commission of Texas (PUCT) are very eager to be the one that steps up to order the re-pricing of wholesale Real-Time Index or Ancillary Service prices that have been in question over the past month. Instead, it seems like everyone is resigned to allowing the lawyers to argue their cases and leave the outcome up to the courts.

On Tuesday, March 16, 2021, the New York State Energy Research and Development Authority (NYSERDA) released a status report on “Regulations Establishing Energy Efficiency Standards.” In addition to reporting on the status of energy efficiency regulations, this report includes recommended amendments to New York law that would add new categories to the state’s energy efficiency performance standards. These recommendations have been crafted into a “Program Bill” – legislation written by the Governor’s administration – which is being shopped around in the State Legislature for a sponsor.

It has been three years since PJM held its last capacity auction. That last auction, which was held in May 2018, established capacity prices for the May 2021 to May 2022 delivery year. Over the last couple of years, there has been a great deal of uncertainty in how capacity prices would be valued beyond May 2022. Before getting into details of the upcoming capacity auction, we should review what capacity is and why it matters.

Since the dawn of electricity deregulation, most commercial and industrial clients have relied on brokers and sales reps as their primary source of education and strategy development. Clients meet with a different set of sales people to discuss procurement, engineering, demand-side management, sustainability, and resiliency, leading to a fractured decision-making process and piecemeal strategies that lack depth, diversity, harmony, and foresight. When energy prices are falling, the weather is following normal patterns, and suppliers are offering low bids in a race to the bottom, any sales rep or broker running a simple procurement process can appear to be adding value to your business.

From time to time, events occur that reshape and redefine an industry. These events can often prompt stakeholders, lawmakers and customers to question and reevaluate some of the basic premises on which an industry was built. This is the kind of event that happened across Texas during the week of February 15, 2021. While the power outages and the arctic temperatures sent shockwaves throughout the state’s energy markets, the personal toll was equally, if not more, devastating. Millions of Texans were without heat, electricity, and water for days where the thermometer struggled to climb above freezing. But, as is often the case, calamity brings out the best in people as neighbors came to each other’s aid to help wherever possible. And while this story will certainly be told and assessed through gigawatts, hertz and dollars, none of these units can begin to measure the human pain and suffering that was caused by this event.

Electricity prices in NYC are starting to show signs of consolidation. Earlier this winter, mild temperatures in the months of November and December placed downward pressure on both near-term gas and power futures prices. This can be seen in Figure 1, which shows wholesale forward electricity prices in NYC for calendar years 2022 through 2025. This market correction, which lasted through the end of December, created good purchasing opportunities for many in NYC. Since the beginning of the year, prices have rallied, increasing between 2.5% and 5.1% across all calendar years except 2023. Note the flat to downward slope of electricity prices for calendar year 2023 (black line). While near-term prices in 2022 have rallied, falling prices in 2023 and have produced a degree of consolidation and created good purchasing opportunities.

PJM kept its cool last week as power markets in the midcontinent were struggling under the strain of record-setting energy demand due to a historic cold spell. Unlike what happened in Texas, grid reliability was maintained, and spot electricity prices remained under control. In PJM, the electricity futures market continues to trade sideways and largely rangebound between $26-30/MWh in the wholesale market across the entire region. Clearly, it will take more than wild weather to materially move this market.

Valentine’s Day may warm our hearts, but it often coincides with some of the coldest weather of the winter, and this year was no exception. Last week, Valentine’s Day weekend was followed by Presidents Day, which means that gas traders must make their purchases for the long weekend on Friday to cover the next four days. The weather forecast on that Friday pointed to record cold temperatures across most of the midcontinent and extending into south Texas. The expectation of cold temperatures and high heating demand over the long holiday weekend started to produce volatility in natural gas markets as early as Friday afternoon.