Over the last month, electricity futures in PJM have increased across all calendar years out to 2025.  The most dramatic movement has been in the wholesale price of electricity for calendar year 2020.  Figure 1 shows wholesale power prices in PJM East going back to the beginning of 2019.  This chart shows that the price for calendar year 2020 (the dark blue line) has consistently been higher than calendar years 2021 through 2023. 

There are two things we were watching closely this summer:

• The temperature and its impact on the ERCOT reserve margin.
• Tariff updates from the delivery companies.

In terms of the weather and ERCOT reserve margins – everything was fine until the second week of August.  In the month of July, North Texas didn’t see a 100º day until the last day of the month, which is rare.  But as mother nature often does with averages, August arrived and reset everything back to “normal.”

Many states throughout the country, especially along the East Coast, have aggressive plans to construct solar and wind farms to produce electricity.  States such as New York and Maryland have established mandates that will require up to 50% of the electricity in those states to come from renewable sources over the next 10 to 15 years. And while these goals are admirable, the facts are that strong, sustained winds and lots of sunshine are not abundant in the Northeast.  Additionally, there are plenty of opposition groups that, may ultimately, block these initiatives which will require new transmission lines to distribute this electricity.

Over the last two weeks, there has been a significant increase in the price of prompt month (October) natural gas. Since the beginning of the year, prompt month gas prices had been declining. That slide stopped in late August as the October gas contract was trading at $2.19/MMBtu.  At the time of this writing, the price of October gas was trading around $2.68/MMBtu, an increase of about 22%. These recent price changes in the prompt month gas contract are shown below in Figure 1.

There’s been a lot of news around the natural gas market this past month.  Most of that news has been bad for producers and good for buyers of the commodity.  Natural gas injection quantities have, as expected, been significantly stronger this summer compared to last year.  The amount of gas consumed for power generation has, in general, been in line with expectations and similar to last summer.

Over the past two months in Texas, we have witnessed our dream summer: a July where there was plenty of rain across the state, where North Texas didn’t see an official 100-degree day until July 31st, and where both Real-Time electricity index prices were tame, and forward summer prices fell. Then August came.  The streak of sub-100 degree days ended, a high-pressure weather system settled in and we were all reminded of what summer in Texas is all about.

Over the last four weeks, wholesale power futures in New York have risen but remain in an attractive position to make near-term purchases. Figure 1 shows wholesale calendar prices for 2020 through 2024 since the beginning of the year. Futures hit their highs during the first week of May. During that week, calendar year 2024 (orange line) was the most expensive at $50.56/MWh and 2020 (dark blue line) was the least expensive at $37.21/MWh.

In February 2019, Maryland’s state legislature introduced Senate Bill 516.  This bill was passed by the Maryland Assembly and became law in May 2019 without Governor Hogan’s signature.  This new law, known as the Clean Energy Jobs Act, increases the state’s Renewable Portfolio Standards (RPS) to 50% by 2030 and includes a mandate that 14.5% of its electricity come from solar sources by 2028.  This law also puts a plan in place to increase the RPS to 100% by 2040.  In addition to the state’s new RPS, the Clean Energy Jobs Act would develop one of the most aggressive offshore wind programs in the country which will create 1,200 MWs of generating capacity.  By comparison, the nation’s only other active offshore wind project produces 30 MWs from 5 wind turbines off the coast of Rhode Island. 

Electricity futures in PJM have decreased over the course of the summer and are favorable for making longer term purchases.  Figure 1 shows electricity futures prices at the PJM West trading hub (Southwestern PA) out to August 2024.  The blue line is the price curve on April 8, 2019 and the black line is the price curve on August 12, 2019.  In the Northeast, winter electricity prices are the primary determinant for electricity prices. Since the beginning of the summer, the peak winter price in January has fallen by 10% out to 2024 as illustrated with the green arrows. Note that the peak summer price in July of each year has also decreased materially over the last three months.    

How much farther will natural gas prices fall?  Of course, no one really knows the absolute answer to that question.  But in the near-term, the answer may be $2.40/Dth.  Figure 1 shows the NYMEX trading history for a one-year period from August 2019 to July 2020.  One can see that futures prices declined steadily until last fall and then began to rise until March of this year.   Since then, NYMEX futures have persistently fallen from its peak of $2.91/Dth on March 21st.  The question among traders was: how low can it go?  As shown in Figure 1, the price floor for the August 2019 to July 2020 strip seems to be in the neighborhood of $2.40/Dth, which is where the market stopped falling back in the last week of June and the first week of July.  One of the reasons for the recent bearish price trend has been the large amounts of natural gas that have been put into storage.