A Review of Resources Adequacy Risk in PJM

On May 17, 2022, PJM released the second phase of its “living study”, titled Energy Transition in PJM: Emerging Characteristics of a Decarbonizing Grid, which analyses the potential impacts associated with the evolving resource mix. The report, which follows the initial framework released in December 2021, studies three scenarios: Base, Policy, and Accelerated (see Figure 1). Each scenario represents an increasing amount of annual energy in PJM served by carbon-free generation in 2035: 40%, 50%, and 70% respectively. For reference, according to Monitoring Analytics, the grid operator’s market monitor, in 2021 39% of the power produced in PJM was from carbon-free resources.

Natural Gas Update for May 2022

This past month, the US natural gas market continued the recent trend that was established in mid-February. Strong bullish tendencies set new highs and blew past previous resistance levels (ceilings or limits to the upside) while also setting new support levels for any possible retracement in the future. Figure 1 shows how the June contract settled with daily candlestick bars. And while the curve seems to have given up its exponential shape from early April, it now appears to maintain a linear upward trend. The previous two market retracements during this sustained rally both took place directly after touching the psychological resistance levels of $8.00 in mid-April, and again at $9.00 in early May, otherwise, the market has been on a consistent upward trend.

NYISO Power Market Update for May 2022

Near-term electricity prices in New York City continue to climb like an Aaron Judge home run that has not reached the apex of its arc. Figure 1 shows calendar year strip prices for 2023 (blue line) through 2026 (yellow line). Despite a short-lived correction in the middle of May, price movements have mostly been in one direction over the last year.

If you have been shopping for retail power in Texas, then what we are about to report will not come as a surprise. However, if you have not seen wholesale power prices in ERCOT in a few months, you should probably sit down before you continue.

On April 1, 2022, the NYISO published the results of the six-month capacity Strip Auction for this coming summer period (May through October), establishing the first auction-based price signal for capacity for the upcoming months. This is important because capacity is the second largest cost component in a retail electricity contract. Often, when the wholesale price of energy increases, capacity prices decrease. Many expected lower capacity prices given how high wholesale power prices in the state have been, and that is exactly what happened with this most recent auction.

Pennsylvania joins RGGI, Largest Coal-Fired Power Plant Announces Continuation of Operations. 

On April 23, 2022, Pennsylvania became the 12th member of the Regional Greenhouse Gas Initiative (RGGI), a market-based cap-and-invest initiative that sets an allowance on CO2 emissions and requires power plants to pay to offset their carbon emissions. As part of RGGI, PA will be required to make annual emissions reductions of 3%.

Over the last few months, these updates have focused on the steady run-up in natural gas prices, and the correlation between US natural gas prices and gas prices in other parts of the world, specifically the price of LNG in Asia and Europe. Each month it may seem like a broken record (pun intended, get it?) as we report that wholesale natural gas prices have hit new, record highs. This month, domestic natural gas soared to 10+ year highs, which pushed short-term forward prices to levels we have not seen since early 2008. The last time prices were this high, this country was in the midst of “the Great Recession” and “hydraulic fracturing” was just emerging as a technology that sent a very volatile gas market into a decade of slowly declining prices.

On behalf of the team at 5, I am pleased to forward our market letter for the first quarter of 2022. In this issue, we continue our focus on the energy transition and the strain that this has put on the energy market. Our last letter quoted Larry Fink of Blackrock on the importance of navigating the “global energy transition.” The past quarter’s events add geopolitical risks to the navigational challenges associated with this transition.

What is the Jones Act and how does it impact our energy markets?

In January 2018 a cold snap descended across the Northeast. And in Boston Harbor, a liquified natural gas (LNG) tanker appeared on the horizon, ready to unload its cargo at the only port terminal in the lower 48 states equipped to process imported gas. The massive ship flew a red, white, and blue flag, but not that of the United States. Instead, it was the flag of the Russian Federation. The ship is called the “Gaselys” which, in the Russian language, translates to “extinguished” and it carried natural gas sourced from the Yamal Peninsula in Siberia. The owner of the LNG export terminal in Russia from where this ship set sail is Novatek, Russia's largest independent producer of natural gas. This is the same company that was put under sanctions by the US Treasury Department in 2014 after Russia invaded and seized Crimea from Ukraine. And while the company was sanctioned, the natural gas that it sold to New Englanders was not.

What is causing global forces to outweigh the domestic signals for natural gas prices?

If you still buy into the old trader’s tale of “buy natural gas in the fall and spring when it is cheaper” it’s likely that your energy purchasing strategies are as unlucky as your March Madness bracket. Last fall we saw one of the largest natural gas rallies in recent history as European and Asian storage levels were depleted and international LNG prices reached record highs. Now, at the beginning of spring, when natural gas withdrawals from storage are starting to dwindle and the country normally shifts to producing more natural gas than it consumes, we are again looking at another significant market rally, with April’s NYMEX contract settling at the highest price for any April delivery since 2008.