What is Driving the Extreme Volatility in the Natural Gas Market?

The NYMEX Henry Hub prompt month future contract continued to push the volatility envelope this past month, with the daily change for August delivery exceeding $0.37/MMBtu. This is significant because the average daily change over the previous twelve July’s average was approximately $0.05, with a maximum average daily change of $0.08 back in 2012 (See Figure 1). Last month, we wrote about the explosion at the Freeport LNG plant south of Houston, Texas, and how it affected both international and domestic prices for natural gas.

NYISO Creating More Access to Renewables

On July 11, New York celebrated the commissioning of the Empire State Transmission line. The 20-mile line connects the Dysinger switchyard in Royalton to the East Stolle switchyard in Elma, creating a new transmission hub in Western New York (see Figure 1). The $180 million power transmission line upgrade enables an additional 3,700 MWs of renewable energy to be transmitted throughout the state.

What is Driving the Increased Load in Texas?

This summer, it is clear how much the state of Texas has grown over the last few years. When Texas first deregulated its power grid about 20 years ago, the population of Texas was around 20 million. By 2010, it had grown to just over 25 million, and by 2020 it was just over 29 million. Texas is actually expected to hit 30 million this year, a growth of about 50% in 20 years. With this kind of population growth, it is no wonder that the total load on the ERCOT grid this summer is setting all-time records, it is just the frequency and magnitude of those records being broken that caught many of us by surprise.

PJM Summer Spot Prices Now Higher Than Winter

Anyone who has entered into a new electricity agreement in the last twelve months knows that prices are between two and three times higher than previous contracts. One year ago, wholesale electricity for calendar year 2023 was trading at $30.77/MWh at the PJM West hub in Western Pennsylvania. In early May 2022, it peaked at $88.35/MWh, a nearly three-fold increase. This rapid rise in electricity futures has created sticker shock for many electricity and natural gas buyers over the last year. And while this may not be news, some buyers may be surprised to learn that spot electricity prices in PJM are at their highest levels in over ten years.

On behalf of the team at 5, I am pleased to forward our market letter for the second quarter of 2022. The dramatic increase in the price of electricity and natural gas noted in our Q1 letter continued its upward climb in Q2, fueled primarily by the war in Ukraine and its impact on the price of LNG. This dramatic increase is shown in Figure 1.

The All-Electric Building Act, known as New York S6843C, has died on the proverbial vine without getting a vote from the full New York State Senate or Assembly.

On Wednesday, June 8, 2022, from 10:00 AM to about 12:00 PM CDT, the July contract for NYMEX Henry Hub was trading around $9.60 per MMBtu. Even so, $9.60 is not an all-time high price for NYMEX Henry Hub. During the fall of 2005, after Hurricanes Katrina and Rita significantly reduced oil and gas production in the Gulf of Mexico, the Henry Hub contract settled above $9.60 from September through January before settling back down below $9.00 in February 2006. Additionally, during the spring and summer of 2008, April through August settled above $9.00. Since September 2008, no month has settled above $9.00. So, on the morning of June 8, after rallying up 30¢ from the previous night’s closing price of $9.30, it looked like natural gas would again test the $10 mark for the first time in nearly 15 years. Then there was an explosion at a plant due South of Houston, near a small town called Freeport, Texas.

On June 21, 2022, PJM posted the results of its capacity auction, also known as the Reliability Pricing Model (RPM), for the planning year June 2023 to May 2024. The execution of this auction has been postponed multiple times over the last few years due to FERC rulings on the validity of the PJM auction’s design. Differences between FERC and PJM seem to have finally been resolved to the extent to allow the auction to proceed. This is important because these latest auction results give the market some much-needed clarity into future capacity costs, which are a major cost component of next year’s overall electricity costs for all retail customers in PJM states.

A Review of ERCOT's Seasonal Assessment of Resource Adequacy report for Summer 2022

The Seasonal Assessment of Resource Adequacy report, otherwise known as SARA, is a quarterly publication from ERCOT that gives its assessment of the short-term risk of Energy Emergency Alerts. This assessment looks at both load growth and peak demand forecasts, along with generation capacity and probability of availability to determine the potential for the state’s power grid to run out of power when it is needed the most. In May, ERCOT published the SARA report for this summer, with the following highlights.

An Overview of Coincidental Peak Costs by ISO

Coincidental Peak (CP) is the measurement of an electricity meter’s actual usage at the time of the regional grid’s highest demand and determining that meter's share of the entire grid’s demand. This concept of identifying a facility’s share of the grid’s total maximum demand is often used in determining the allocation of specific cost components. The specific methodology of how that equation works and which cost components it impacts varies from region to region, and often even utility to utility, and even by customer class, but the overall concept is the same. In this post, we explain how this works in each of the major, deregulated electricity regions, and detail which costs are the most impacted by this variable.