Energy Markets Update 

Weekly natural gas inventories

The U.S. Energy Information Administration reported last week that natural gas in storage increased to 55 Bcf. There was an injection for the same week last year of 47 Bcf while the five-year average injection is 54 Bcf. Total U.S. natural gas in storage stood at 2,629 Bcf last week, 17.1% less than last year and 6.7% lower than the five-year average for this time of year.

FERC launches proceeding to reform transmission policy

The Federal Energy Regulatory Commission on Thursday initiated a procedure to examine how federal transmission policy could be revised to enable the Biden administration’s goal of 100% clean energy on the US power grid by 2035 and a carbon neutral economy by 2050. Transmission reform is one of the larger obstacles that the US faces in order to achieve a fully green grid as new clean energy resources, many of which are sited away from load centers, will need access to wholesale transmission system. Doing this in a way that is both economically efficient and fair to stakeholders has long been a challenge.

FERC’s recent decision represents the first step in its rulemaking process and acts as an acknowledgment of a potential regulatory overhaul to come. Rulemaking will be a complex and laborious process, as it remains complicated to find a balance point between accelerating the nation’s energy transition and maintaining consumer and stakeholder interest. Commissioner James Danly warns that FERC ought to ensure that costs a new policy revision are still meet the “just and reasonable” rates standard. FERC’s action opens a public comment period, with the aim to understand how transmission planning, cost allocation, and interconnection processes can be improved. Many industry strategists believe this could be the forum to advance some of the large “spoke and wheel” transmission corridors that have been proposed by the offshore wind industry.

Energy Markets Continue to Rise

A common topic in recent SourceOne newsletters, national energy markets continue to heat up, with further increases seen in forward trading prices at major energy hubs in the past week. Driven primarily by increasing natural gas trading prices, regional wholesale power forwards are also on the rise.

Overall Takeaway:

The distinct difference in pricing for the years after 2022 indicate that the meteoric prices increases are a “transient” market shift and that conditions will likely revert back to price levels experienced over the past 5 years. There have also been some notable fundamental changes in recent months. These include the hottest June on record, strong gas demand from Mexico and many LNG importing markets, a fleeting credit crisis due to the winter debacle in Texas, and lackluster gas production. Despite all that, the US gas market is extremely resilient and the national storage picture is not tracking much below the norm. We suspect that much of the recent price increase can be attributed to the broader inflationary fundamental outside of the energy market and are mindful that US energy markets are not immune to these pressures.

The following section details just how much forward power pricing has shifted over the past year.

New England Power Prices:

Around-the-clock wholesale annual strips at New England ISO Internal Hub are currently trading between $42-47/MWh for the next four years, with a $3-4/MWh premium attributed to the prompt year of 2022. The trading price for the 2022 annual strip settled yesterday at $46.33/MWh, up 37.4% from the trading price a year prior. The 2023 annual strip has undergone a similar, though somewhat muted, change, settling yesterday at $43.33/MWh, a 23.6% increase from the year prior.

New England power pricing is strongly correlated to natural gas pricing, as it is the primary generator fuel in the region. As natural gas supply and demand fundamentals have decreased the perceived surplus of gas in the US, power prices have risen accordingly. With the nation experiencing a hotter-than-average summer, natural gas demand has been high as the generators consume it to meet high cooling demands.

New York City Prices:

Prices in New York have undergone similar shifts as New England, though there is a premium seen in pricing for the years past 2022, a distinct difference from New England pricing.

Around-the-clock wholesale annual strips for New York City (also referred to as “NYISO Zone J”) range from $43-47/MWh for the next four trading years, with the most expensive year of the four being 2025.

The trading price for the 2022 annual strip settled yesterday at $43.93/MWh, up 35.43% from the trading price a year prior. The 2023 annual strip has undergone a similar, though somewhat muted, change, settling yesterday at $42.57/MWh, a 22.5% increase from the year prior. The New York forward strip is influenced by additional factors including heavy integration of reviewable over the next decade and the possible integration of carbon pricing into the wholesale market.

PJM Prices:

Wholesale power prices in the Mid-Atlantic and Midwest (those under the umbrella of the PJM Interconnection) have also risen over the past year, but not to the same degree experienced in the Northeast. The region has access to cheaper natural gas and coal, as well as ample generation resources due to its geographic qualities, so it has been less impacted by the rises in the national gas market. PJM has a much greater propensity of fuel switching between gas and coal, which has already begun to happen and is one of the foremost reasons that price changes in this market will not strictly correlated with gas prices.

Around-the-clock wholesale annual strips for PJM’s Western Hub range from $29-33/MWh for the next four trading years, with a $3-4/MWh premium seen in the prompt year of 2022. The 2022 annual strip for the Western Hub settled at $33.06/MWh yesterday, up 23% from the prior year. The 2023 annual strip settled at $29.61/MWh, up just 10.8% from the prior year.

Please contact your SourceOne Energy Advisory to discuss how price volatility may be affecting your portfolio.

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