The state of New York has been aggressive in its attempts to de-carbonize the state’s economy.  Its goal is to reduce carbon dioxide emissions 40% by 2030 and 80% by 2050 relative to levels in 1990.  Every kilowatt-hour of power used by both businesses and consumers relies on the output of a power plant to make that electricity.  The New York Independent System Operator (NYISO is the public entity responsible for managing the state’s electricity grid), realized that the state’s wholesale electricity markets were not aligned with the state’s vision for reducing carbon dioxide emissions. 

Usually, hot summer weather starts to take hold in Texas during the month of June.  In most years, the temperature climbs steadily throughout that month with average temperatures at the end of June about 6 degrees higher than it was in the beginning of the month.  Typically, in Dallas, June’s average temperature is in the mid-80s with maximums that vary between 89º and 94º Fahrenheit.  This year, June’s average temperature in Dallas was 79.9º, which was 5.8º cooler than last year.  Average temperatures this May were also 5.6º cooler than last year.  The temperature differences can be seen in Figure 1 which shows the Cooling Degree Days in Dallas over the last six years.  A cooling degree day (CDD) is a measurement that quantifies the demand for electricity required to cool a building.  A CDD is the number of degrees that a day’s average temperature is greater than 65º Fahrenheit.   The data in Figure 1 shows that June 2019 was one of the coolest in the last six years with 30% fewer CDDs than last year.  And while May 2019 had the second highest number of CDDs since 2013, there were 30% fewer CDDs than last May.  The 6º (or so) of temperature separation from last May and June’s average temperatures have had a significant impact on wholesale electricity prices.

Consequences of Increased State Regulations of Wholesale Energy

State Renewable Portfolio Standards and other renewable power regulations increase the cost of electricity and creates budget uncertainty. Large energy users need to follow multiple state regulations to estimate future energy costs. At 5, we are spending more and more time advising clients on state regulations as well as new local regulations that address carbon emissions.  New York City just adopted building regulations that require all buildings over 25,000 square feet to reduce emissions by 40% by 2030 and by 80% by 2050.  Buildings that are unable to meet emissions targets will be subject to significant fines.  It will be interesting to see if other local jurisdictions follow New York City and pass regulations to address carbon usage.

Like a lot of myths or half-truths, the belief that natural gas and crude prices are positively correlated (move in the same direction up or down at similar times) was at one time very true, but as technology and trends changed over time, so did this correlation. Recently, even energy traders held onto the belief that natural gas and crude oil would always trade within ratios of approximately 10:1 to 12:1. This means that if crude oil were trading at $24 per barrel, then natural gas would trade at approximately $2 per MMBtu, or in similar ratios of $36 to $3 and $48 to $4.

One of the biggest urban legends in the power buying process is that, clients should buy electricity during the spring or fall months because that is when prices are at their lowest. Like all legends, there is a small element of truth behind this belief - but on the whole, it is completely wrong.