Energy Markets Update

In this newsletter, we cover key factors impacting US energy markets. We focus on AI's impact on energy demand and explore the shift in nuclear energy sentiment during 2024. Additionally, we examine the 2025 outlook for the solar industry. Finally, we discuss how to prepare for winter storms and their effects on natural gas supplies and prices.

Table of Contents

• Gas & Power Update
• Looking At Energy and Climate Under the Incoming Trump Administration
• Constellation's Whirlwind Month
• 2025 Rate Cases to Watch

Weekly Natural Gas Inventories

Source: EIA

Source: EIA

US Energy Market Update

• Brrr..it’s extra cold in here. For the first time in two years, January has brought below-average temperatures to most states east of the Rocky Mountains. And unlike some previous winters characterized by fleeting cold patterns, this freeze is sticking around. This weekend, we’re bracing for an even more severe cold snap as the polar vortex - a system that usually confines the coldest air to the Arctic - dips into large swaths of North America. Much of the Lower 48 U.S. could experience temperatures 30 degrees below the seasonal norm.
• How a colder outlook drove markets higher: at the start of this year’s heating season, signs and forecasts like the one shown below from NOAA pointed towards a mild winter. But if you’ve stepped outside lately in most of the country, you'll notice that time has given way to an unexpected visit from Old Man Winter. We now find ourselves in the heat of the coldest season with a rallying market and NYMEX futures hitting two-year highs.
  
  
  
  Source: NOAA
• According to JPMorgan, current forecasts for January imply that we will realize nearly 1.7 standard deviations colder than the 10 year normal, resulting in 1,024 heating degree days, 137 more than the 10 year average. This could drive a 1 tcf withdrawal of natural gas for the month alone, a significant dent in an end of October storage position nearing 3.7 tcf.  
• As might be expected, the futures market has rallied. Prompt month gas is trading over $4.00 per MMBut for the first time since January 2023, and the NYMEX 12-month strip ($3.94) posted significant gains ($0.51) since last week. The low point in the 2025 NYMEX strip was Nov 8 at $3.00. 
• Implications reach further out than the balance of winter. The Summer 2025 price now sits about $3.60/Dth as the market speculates what a withdrawal-heavy winter will do to storage and production.
• It’s weather, weather, weather that will dictate which way the market tips for most of the balance of 2025. All eyes are on February - will it follow the January cold, or will we see average temperatures cool down the market (as forecasts are currently showing)?
• Power futures have lifted accordingly, with 2025 futures adding about $5 per MWh in both PJM and New England over the past 5 weeks.
• It’s worth noting that despite the cold temperatures, some of traditionally “prone regions” such as New York and New England, have thus far performed reasonably well. Over the past month we’ve had about 2 weeks > $100, but the lid has stayed on the pot thus far. Grid operators have not indicated any real stress. 

Historical NEISO and NYISO Power Pricing

Source: NEISO & NYISO

• Plaquemines LNG became the U.S.’s 8th operational LNG export terminal in December and contributed to a record high LNG feedstock flow of 15.8 bcf/d reached on January 11. Two additional LNG facilities are expected to come online this year. In past newsletters we’ve voiced our concern about the rapid projected growth of North American LNG exports, which are now expected to double from 2024-28 (reaching 24.4 Bcf/d). That is slightly less than 25% of today’s daily production rates. The increase in exports will put upward pressure on domestic gas prices.
• US electricity consumption grew 2% in 2024 following two decades of minimal change. This 2% YoY increase is expected to continue through ‘25 and ‘26, driven largely by data center growth and new battery manufacturing plants.
• Constellation’s acquisition of Calpine Corp. has set the industry abuzz this week (see our breakdown of this acquisition and its implications below). 2025 is expected to be a “banner year” for large-scale gas plant acquisitions, a departure from prior years’ laser focus on renewable energy M&A. The total value of gas plant acquisitions in 2024 exceeded ‘23 by ~$1.2B, and is expected to surpass this figure in ‘25. This underscores the fact that natural gas remains the easiest way for buyers and energy providers to meet immediate energy needs.

Looking at energy and climate under the incoming Trump administration

With President Elect Trump’s inauguration just a week away, we revisit some of the likely changes that await the energy industry.

• President Elect Trump supports expanded LNG exports and the domestic drilling and exploration sector. Reuters has speculated that one of his early executive actions could be to resume federal review of LNG export applications, which were previously stalled by the Biden Administration. 

• Reuters anticipates that President Trump will leave the international climate accord or “2016 Paris Agreement", for the second time, early on in his term. Trump has also signaled he will try to roll back new EPA emissions rules on coal and gas plants, and greenhouse gas (GHG) reduction regulations for transportation and fossil-fuel fired power plants as well as measures to reduce methane emissions from oil and gas production implemented by the Biden Administration. This mirrors the actions of the first Trump Administration, which rolled back over 100 environmental regulations through executive actions and congressional resolutions.

• Broadly speaking, the incoming administration has communicated a desire to reduce regulation and examine ways to cut spending. Certain clean energy incentives, such as EV tax credits, could be potential areas for cuts. 

• On the campaign trail, Trump promised to repeal the Inflation Reduction Act. However, the IRA is popular for bringing economic development and jobs to areas across the country. It is more likely that he will pursue a “scalpel approach,” attempting to repeal initiatives like tax credits for electric vehicles but not pursuing a total repeal of the IRA.

• The overall impact to the renewable energy sector is somewhat hard to predict. Some market players are optimistic that broad deregulation and fast tracking of energy infrastructure could be good for business, and if the IRA remains largely intact, this would be beneficial.

• Another question of significant importance is how organizations may align themselves with the policy objectives of the new Administration. Just this week, the Net Zero Asset Managers (NZAM) initiative announced it was pausing activities after Blackrock,  the largest asset manager in the world and NZAM’s most influential member, announced it would leave the group. This appears to mirror the collapse of the Net-Zero Banking Alliance (NZBA) last month after the initial exit of Goldman Sachs.  

• One of the overarching challenges the new Administration will face is the growing cost of energy. Increased US liquified natural gas (LNG) exports, which the Administration supports, are price inflationary and significant although their impact will be felt over the next 5-10 years. This will coincide with explosive growth in demand from datacenters and electrification. 

• Rolling back legislation and regulations could result in an increase in US GHG emissions. A recent analysis by the Rhodium Group report suggests that current policies related to GHG emissions could lead to a 38-56% reduction in GHG emissions from 2005 levels by 2035. Repealing these policies could hinder or eliminate these emission reductions.

Constellation’s Whirlwind Month

• At the start of the month, Constellation, the nation’s largest producer of emissions-free energy and operator of nuclear power plants, was awarded a contract by U.S. General Services Administration (GSA) worth over $1 billion. The GSA will take more than 1,000 GWh of nuclear power every year for the next ten years. The procurement will deliver electricity to more than 13 government agencies, including 80 federal facilities located throughout the PJM Interconnection. 
• A portion of the power will come from investments Constellation will make to increase plant output, growing capacity and enabling the extension of nuclear plant life. They plan to extend the licenses of existing nuclear plants and invest in new equipment and technology that will increase output by about 135 megawatts. 
• Constellation will perform energy savings and conservation measures at five GSA-owned facilities in the National Capital Region. This will include weatherizing federal buildings and expanding the use of LED lighting, and four buildings in the nation's capital will be converted to electric boilers and heat pumps from current steam power systems.
• Nuclear energy has historically been excluded from most corporate and government sustainable energy procurements. This agreement exemplifies a current trend showing more groups, like Microsoft, that are displaying support for continued investment in nuclear energy. Microsoft signed a 20 year PPA with Constellation in October that will resuscitate the shuttered reactor at Three Mile Island.  
• Constellation to Buy Calpine Energy: Following the announcement of their GSA contracts, Constellation publicized the agreement under which they will acquire Calpine Corp. for $26.6 billion, promising to offer an extensive range of energy products, competitive pricing, and diverse services in the industry. Calpine is the largest U.S. producer of energy from low-emission natural gas generation and has a substantial renewable energy portfolio. This deal is driven by the increasing electricity demand from AI and electrification of transportation and buildings. Demand for electricity in the United States is predicted to grow 16% (128 GW) in the next 5 years. Constellation is positioning itself to benefit from an expansion of gas-fired power generation that may be required to meet this demand on a tight timeline. 
• The agreement creates the nation’s largest clean energy provider, opening opportunities to serve more customers across the nation with a broader array of energy and sustainability products, the combined company owning 60,000 MW of operating capacity (31,478 MW of gas generation and 22,238 MW of nuclear generation).

Source: S&P Global Market Intelligence

• Calpine's generation fleet is concentrated in California, Texas, the mid-Atlantic and the Northeast. This deal significantly broadens Constellation’s geographic exposure. The combination increases Constellation’s capacity in Texas from 15% to 25%, increases exposure to California up to 10%, and reduces overall exposure to PJM from 65% to 45%. 

Source: S&P Global Market Intelligence

• Constellation’s stock topped $315 per share this week. The closing price on Jan 15, 2023 was $85.16.

Understanding the Magnitude and Timing of 2025 Rate Increases

We look at upcoming rate cases for natural gas and electricity and their potential impact on ratepayers.

• Electric utilities across the U.S. are proposing significant rate increases for 2025, with 83 open rate cases totaling a staggering $16 billion in annual revenue requirements. It's important to note that final settlements typically result in lower approved amounts. From the beginning of 2023 through August 2024, regulators approved 58% of utility rate increase requests, according to S&P Global. 
• This level of rate case activity follows record-breaking and near-record-breaking years in 2023 and 2024, where nearly $10 billion in rate increases were approved annually across the lower 48 states.

• The surge in rate increase requests in recent years is driven by utilities' need to invest in infrastructure. This is due to:
  • The grid's vulnerability to extreme weather events
  • Growing electricity demand from industrial electrification
  • Renewables infrastructure and generation upgrades to meet state energy mix targets
  • Rapid expansion of data centers in the technology sector
  • Higher inflation on physical plant and labor
• According to the Regulatory Research Associates (RRA), rate case settlements are expected to be evenly distributed throughout the year (see chart below). However, past trends suggest that many decisions may be delayed until December, coinciding with year-end deadlines to get the cases wrapped.

RRA's Expected Volume of Rate Case Decisions in 2025

Source: S&P Regulatory Research Associates

• In 2025, the largest single increase, and a highly controversial one, will be out of Southern California Edison’s (SCE) rate case (see chart below). Not only is it the largest pending case right now at a little over $4B, but it doesn't address the fires currently scorching LA County that will invariably find their way into ratebase in the near future. We can only anticipate the level of opposition that SCE will face as they seek to raise rates, which are already the highest in the nation, to pay for infrastructure, some of which has burned, on a customer base that has just suffered extreme losses. There is precedent here that California’s regulators will settle with SCE in 2025 for not only the current case but another to follow, as we covered last September when state regulators gave Pacific Gas and Electric (PGE) allowances for four separate rate hikes in 2024 alone.

RRA's Summary of 2025 Requested Rate Increases in Billions ($B)

Source: S&P Regulatory Research Associates

• Timing is crucial when forecasting future energy costs, particularly regarding rate case decisions. Our team of analysts specializes in helping customers understand the magnitude and timing of potential utility-side cost increases. Many of these increases are unavoidable, but often there are significant changes to how rates are recovered that open opportunities for customers–a trend towards demand side rates is a good example. Look out for updates from our team as the 2025 rate case decisions progresses.

Market Data

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