Energy Markets Update

In this newsletter, we cover key factors impacting US energy markets. We focus on executive orders from the new administration, developments in the AI market, updates to the PJM capacity market, and issues and developments in renewable energy projects.

Table of Contents

• Gas & Power Update
• Making Sense of This Week’s Executive Orders on Energy
• DeepSeek Shakes up AI and US Power Markets
• PJM Capacity Market Updates
• Headwinds: Trouble in the US Wind Energy Sector
• Northeast Clean Energy Transmission Projects: A Tale of 2 States
  

Weekly Natural Gas Inventories

Source: EIA

Source: EIA

US Energy Market Update

• Volatility returned to US commodity markets this past week as traders tried to make sense of a deluge of new information, from regional weather to Chinese AI chatbots.
• Up until this week, the focus of the market had been on record daily gas demand, a reasonable focus amidst the longest sustained cold in years. A peak daily gas demand of approximately 180 bcf was registered by S&P on Jan 21, which is about 40 bcf higher than the 5-year average for the lower 48. NYMEX gas for February flow surged 25% from $3.00 to $4.00 from the middle of December through last week. 
• Attention shifted on Monday when news hit of a warmer forecast for the month of February, and the release of a Chinese chatbot that could threaten the supremacy of the US AI industry. Claims that China’s DeepSeek AI model was trained at 1/100th of the cost of leading US models gave previously exuberant tech investors something to think about. NYMEX gas for February flow fell 10-15% this week after surging 25% since the middle of December. 
  
  Source: NOAA
• Rates for wholesale power surged in January. Points Northeast surpassed $130/MWh on average for the month of January so far, the first time crossing this threshold since January 2022.

• A slurry of executive orders began emerging from the Trump Administration last week promising fundamental shifts in the production, supply, and regulation of the energy industry. We cover the orders impacting energy in more detail below but the broad-based themes can be summarized by less regulation, broader access for the oil and gas industry, and less offshore wind.
• The Trump administration’s offer of 8 months severance for federal employees to resign by Feb. 6 also extends to staff at the Federal Energy Regulatory Commission, according to a statement by the Office of Personnel Management.
• A proposed settlement announced by PJM this week would implement both a price floor and cap ahead of the next PJM capacity auction covering the June ‘26 to May ‘27 period. A separate settlement would compensate over 2,000 MW of oil and gas capacity under RMR contracts through May 2029. More details on these proposals below.
• In related news, S&P reports that US power plant owners shuttered about 8 GW of mostly fossil-fueled capacity in 2024, about 3 GW more than initially expected but still a sharp drop from the 15 GW retired in 2023.

Making Sense of This Week’s Executive Orders on Energy

In his first week in office, President Trump issued a series of executive orders on energy. Here is a summary:

Unleashing American Energy & Declaring a National Energy Emergency

• President Trump declared a “national energy emergency” to engage new executive powers to increase energy production. Federal agencies are ordered to use “any lawful emergency authorities available to them...to facilitate the identification, leasing, siting, production, transportation, refining, and generation of domestic energy resources, including, but not limited to, on Federal lands.”

• Another executive order ends the Biden Administration’s pause on approvals for new LNG exports, which should hasten the pace at which US gas is exported to foreign markets, however this is unlikely to have a material impact on domestic supplies for some years.

• The order pledges to protect Americans' 'freedom to choose from a variety of goods and appliances' in part by conducting a review of agency policies that may restrict consumer choice. It is unclear exactly how this will play out, but according to a statement on DOE’s website, “The Appliance and Equipment Standards Program at the Department of Energy (DOE) is a Congressionally directed activity that helps ensure energy security and grid resiliency and establishes a uniform and equitable market for domestic manufacturers. The program covers more than 70 products, representing about 90% of home energy use, 70% of commercial building energy use, and 30% of industrial energy use. Standards implemented since 1987 have reduced utility bills for American households and businesses by $105 billion in 2024 alone.”

• A subsequent clarification to the Unleashing American Energy executive order directed agencies to immediately pause funding for climate change programs and EV charging grants associated with programmatic funding of the Inflation Reduction Act and the Infrastructure Investment and Jobs Act.

• Bottom Line: There is general enthusiasm from the oil and gas industry,  however there is also consensus that any immediate expansion of drilling would be uneconomic given current supply surpluses and low prices. On the contrary, LNG exports are price inflationary for US consumers, however these are impacts that will not be felt for a few years. There is obviously less optimism from clean tech. Business leaders anticipate only minor negative impacts on businesses as the bulk of incentives are incorporated into the US tax code. The minority of projects relying on grants and loans are at greater risk; however, the courts will likely decide cases in which funds have been committed. The $7500 EV tax credit remains intact for now, but could be a subject during upcoming budget negotiations. 

Temporary Withdrawal of Offshore Wind Projects

• A presidential memo temporarily withdraws offshore wind leasing and mandates a review of leasing and permitting practices for all wind projects.
• Advanced-stage offshore wind developments that have reached final investment decisions and are under construction are not predicted to be affected. Projects that secured necessary permits but have not reached investment decisions are at a moderate risk of being halted, and remaining early-stage projects are unlikely to see any progress under the current administration.
• Bottom Line: According to NREL, only 4% of operating utility-scale land-based renewable energy capacity—solar PV, land-based wind, and geothermal–are sited on federal lands, so offshore wind will be more significantly impacted. The Administration is likely to use its federal permitting authority to shutdown projects that are in earlier stages of development.  
  Source: US DOE

Permitting Alaskan Resource Extraction & Altering U.S. Int. Environmental Agreements

• Another executive order set out a plan to expedite permitting for energy and natural resource projects in Alaska, specifically oil, gas, and mineral production, and to develop Alaska’s LNG potential.
• Citing the long development timeline for energy projects, Reuters predicts that it is unlikely that U.S. oil and gas companies will expand in Alaska and the Arctic, in part because a future president could reverse this move.
• In a separate order, President Trump has directed the U.S. to again withdraw from the Paris climate agreement, after doing the same in 2017.
• The Climate Mayors, a bipartisan group which represents 350 mayors in 46 US states, issued a statement reiterating their support for the Paris climate agreement.
• Bottom Line: the impacts of this order are less direct. No new oil is likely to originate from previously protected lands in the near future and the impact of Paris climate agreement commitments are not so easy to predict given the divergent positions  of many US states and the federal government. 

Emergency Price Relief for Americans

• This executive order, with the stated goal of reducing the cost-of-living for consumers, instructs executive departments and agencies to eliminate climate policies that raise the cost of fuel and food.
• The order attributes “the assault on plentiful and reliable American energy through unnecessary and illegal regulatory demands” for the reason behind an increase in the costs of transportation and manufacturing. 

DeepSeek shakes up AI and US power markets

• Chinese AI company DeepSeek released its R1 AI model on January 20, 2025, which threatens to be an unanticipated wild card in the US power space. Many AI companies, such as Google, OpenAI, and Microsoft, saw their stocks decrease after the public release of the R1 model. Power futures in the US and companies at the forefront of the energy industry, such as Constellation, also saw prices fall.
• This is largely due to the claim that DeepSeek’s R1 model uses just a fraction of the processing power and therefore electrical power that competitors such as Google’s Gemini and OpenAI’s ChatGPT models. Future projections saw AI representing approximately 75% of US power demand as we approach 2035. If DeepSeek’s methodology does in fact use much less power than competitor’s AI models, then there may not be a need for nearly as much power growth as many currently forecast.
• The market gyrations come just days after the blockbuster announcement of a $500 billion investment in AI datacenters by SoftBank, OpenAI, Oracle, and MGX under a newly formed company known as Stargate Project. We have covered the growth of the datacenter market in the US extensively in previous updates.
• Even if DeepSeek’s methodology does decrease the power needed for AI, there will still likely be increased electrical demand as we move through time. AI is expected to continue to be implemented into more and more applications and practices, and even with a more efficient model, power will be needed to meet increased AI demand. Whether this week’s news has the potential to alter that project demand curve remains to be seen but it is the first real speed bump the industry has experienced over the past year. 

Impacts to the budding nuclear power revival

• Just a few months ago, the anticipated surge in energy demand due to AI integration appeared to be the potential catalyst for the revival of the nuclear power industry. The synergies are obvious: clean, reliable energy delivered across all hours of the day is exactly the type and quality of power supply the tech giants are in need of. Constellation's partnership with Microsoft to recommission Three Mile Island, with Microsoft as the sole offtaker, is a perfect example of this trend. Additionally, new AI hubs are considering nuclear recommissioning in regions such as Northern Virginia, Texas, and Iowa.
• The stock of Constellation Energy (CEG) shed nearly 20% on monday as news of the DeepSeek AI model circulated. It has since recovered about half of those losses.
• In nuclear’s favor, the Trump administration signaled in an executive order signed in Trump’s first week in office their support of co-located generation alongside data centers that are the engine behind American AI companies like OpenAI. He voiced support for generation sources suitable for constant AI demand (e.g. nuclear and gas) while maintaining coal as a backup generation source.
• Trump and new FERC chairman Mark Christie appear aligned on their viewpoints of co-locating generation with data centers, according to Utility Dive. Christie distinguished his support for siting data centers near planned new generation assets (and not the other way around) over concerns that co-locating data centers near existing baseload generators could draw from resources relied upon for constant power supply. Christie also voted against a requested change to an interconnection agreement that would have expanded power sales from Talen Energy’s Susquehanna nuclear power plant in Pennsylvania to a co-located Amazon data center.
• Another crucial question that remains to be answered is whether the proposed agreements would allow the datacenters to lower costs by bypassing the transmission system.

PJM Capacity Market Updates

• It has been a busy week in PJM’s capacity market as the ISO revises market rules ahead of the July base residual auction for the 2026/2027 delivery year.
• To recap, the previous capacity auction saw an RTO clearing price of $270/MW-day, with prices exceeding $450/MW-day in some grid zones. This staggering 833% increase from the previous delivery year was caused by several factors including generator retirements–primarily oil and coal plants–and administrative changes to resource accreditation after gas plant underperformance during Winter Storm Elliot (Dec 2022).
• The timing of PJM auctions have also been operating under significant delays as a result of the many rule changes and subsequent legal challenges in recent years. Consequently, the ISO has postponed its 2026/2027 auction, originally scheduled for the end of 2024, by six months to July 2025. The ISO is also revising market rules to allow for healthier generation availability and, hopefully, lower clearing prices.
• This week PJM agreed on a tentative plan with several governors and other regulatory stakeholders to set a clearing price ceiling of $325/MW-day and a floor of $175/MW-day for the next two delivery year auctions. This price floor is still much higher than the clearing price of the 2024/2025 auction of $28.92/MW-day, however most analysts have been expecting another elevated clearing price on account of delays in the auction calendar–the July 2025 auction will clear prices for generator commitments starting June 2026, which is simply not enough time to build significant new capacity. Per PJM rules, auctions are supposed to occur 3-years ahead of the delivery period.
• Additionally this week, Talen Energy Corp reached an agreement with PJM, the Maryland PUC, and other stakeholders to continue operating the Brandon Shores (1300 MW) and Herbert A. Wagner (800 MW) generating stations beyond their originally planned retirement date of mid-2025. Under the agreement, these units will be classified as reliability-must-run (RMR) and will be considered part of the capacity market supply stack, while not being subject to capacity nonperformance penalties. Talen will receive $312/MW-day to operate Brandon Shores and $137/MW-day to operate Herbert A. Wagner. The RMR contracts for these two assets will remain in effect until May 2029.
• The risk-free nature of the agreement may draw some criticism, but given their importance to maintaining reserve margins and reduced prices, the support to keep them in the supply stack was overwhelming. There is of course a risk that these assets underperform during critical events in the future.  
• Overall, the Talen agreements are very much price deflationary for the next couple of PJM auctions, outside of affected zones in the Baltimore area that will pay much of the RMR premiums–the constraints were largely regional according to PJM’s modeling.
• The agreements will now need to be finalized and approved by FERC.
• We will continue to keep our PJM customers informed of developments in the PJM capacity market ahead of the auction scheduled for July.

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Headwinds: Trouble in the US wind Energy Sector

• With clear opposition to the sector expressed by the new administration, the US wind industry faces some serious challenges, particularly the offshore industry which will be more exposed to federal permitting approvals and leasing restrictions.
• However, 2024 was a rather dismal year for wind as well. Apart from the cascade of cancelled or repositioned projects, mainly due to high interest rates, performance of the existing fleet was also quite poor.
• Three out of four quarters posted below-average wind speeds on the year. This widespread resource deficit left all 20 leading North American wind asset owners grappling with disappointing results, highlighting the vulnerability of renewable energy to natural variability (see chart below).

Wind Speed Variations From Norm Q4 2024 (%)

• The impact of low wind speeds was far from uniform across North America. While Arizona saw wind speeds plummet 9% below average, Illinois and Wisconsin emerged as the lone bright spots within the primary wind markets. This stark contrast underscores the importance of geographic diversification in wind energy portfolios (see chart below).

Q4 2024 - Variation In Wind Speed From Norm Weighted By Project (%)

• The industry's struggles have not gone unnoticed by investors. Companies like NextEra Energy, a sector heavyweight, have seen its stock price stagnate since November 2020, significantly underperforming the S&P 500. Clearway Energy has also seen its stock prices underperform, even in areas with relatively better wind conditions. This underperformance from market leaders sends a strong signal about the industry's current challenges.
• Companies with international operations, such as Brookfield Renewable Partners and Engie SA, have not been immune to these challenges either. Their stock performance reflects the pan-North American nature of the wind energy slump, suggesting that geographic diversification alone may not be sufficient to mitigate risks.
• Ørsted, once considered a pioneer in offshore wind, has become emblematic of the sector's challenges and has recently announced financial impairments. Some issues cited were the revised seabed lease values in New Jersey, Maryland, and Delaware. As we’ve covered in an earlier newsletter delays and ballooning costs for its Sunrise Wind project off of New York’s coast continue pushing the expected completion back to the second half of 2027 which is also a blow to NYS’ environmental policy makers.

Ørsted Trading at 2016 Levels (Danish kroner/share)

• Despite these short-term challenges, the fundamental drivers of the wind energy industry remain strong. The global push towards decarbonization and the increasing cost-competitiveness of wind energy suggests that the current difficulties may be a temporary setback in a longer-term growth trajectory. Wind energy developers' ability to adapt to both political uncertainties and environmental challenges will be crucial in determining the sector's future trajectory and investor confidence as we look to the second half of the decade.

Northeast Clean Energy Transmission Projects: A Tale of 2 States

• On January 27th, the Massachusetts Department of Public Utilities (DPU) approved a settlement greenlighting the New England Clean Energy Connect’s (NECEC) 145-mile transmission line project that will transport 1,200 MW of hydropower from the Canadian border to Lewiston, Maine.
• The NECEC project first gained regulatory approval in 2019, after a very long development process, however it faced significant delays following Maine voters’ passage of a ballot initiative that banned high-impact electric transmission lines in 2021.
• We’ve covered opinion in the past that the ballot measure was itself ill-advised, the potential target of gaslighting by major energy companies, and generally counterproductive to meeting regional grid reliability and sustainability goals. Ultimately the courts ruled that the ballot measure was unconstitutional and threw it out in 2023.
• The project also faced opposition from some MA ratepayers who will be largely absorbing the construction costs (~$1.5B) in their electric rates, according to several rate cases filed at the end of 2024, despite the fact that the whole region will benefit from greater reliability and lower prices.
• In the long term, hydropower is anticipated to be cheaper than many current electricity sources, each year saving customers in Massachusetts $150 million, and those in Maine $40 million (total $3.38B).
• After six years of being tied up in legal disputes, adding an estimated $521 million in project costs (largely due to inflation), the project finally received a go from the DPU this week. Unfortunately, ratepayers are now facing much higher upfront costs.
• The state of Massachusetts has adopted their Clean Energy and Climate Plan for 2025 and 2030, aiming for aggressive emissions reductions and promoting clean energy generation.
• HydroQuebec began working with New England to supply clean energy in 1983, with interconnection reaching as far south as Ayer, Massachusetts.
• About a third of the project construction was completed last summer, and the line is expected to be energized in January 2026.

Clean Path Has No Path

• As NECEC construction powers forward, New York's Clean Path project, envisioned as a 175-mile transmission line designed to deliver 7.9 million MWh of essential renewable energy annually from upstate wind, solar, and hydro facilities to New York City, remains stuck.
• The $11B transmission project was terminated in November 2024 after developers' requests for increased ratepayer subsidies to offset inflation-driven cost increases were denied.
• This has only amplified concerns that the physical limitations of New York's grid could impede on the state's ambitious climate objectives of 70% renewable energy by 2030 and net-zero by 2040. Without the necessary infrastructure to transport renewable energy downstate, aging fossil fuel plants currently powering New York City will continue operations while renewable energy generated by upstate wind and solar facilities will continue feeding into an already predominantly renewable grid.
• New York's 2024 Reliability Needs Assessment identified a 17MW shortfall for summer 2033, which will increase to a 97MW shortage by 2034.
• Yet, there is hope. In an effort to revive the project, seen as a linchpin for future grid stability and a route to cleaner electricity in NY, the New York Power Authority (NYPA) filed a petition with the PUC to designate Clean Path NY as a priority transmission project under the Accelerated Renewable Energy Growth and Community Benefit Act.
• We will update readers with any significant developments on this petition. 

Market Data

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