Energy Markets Update

In this newsletter, we cover the factors you need to know impacting US energy markets as well as PJM's capacity auction, LNG exports, carbon market standards, offshore wind, and weather risks' effect on capacity markets. 

Table of Contents

• Gas & Power Update
• PJM’s Shockingly Expensive New BRA
• Power Sector Adapts to Policy, Demand Growth and Climate Challenges
• Offshore Wind Update
• Getting Tough: Standards in Voluntary Carbon Markets

Weekly Natural Gas Inventories

Source: EIA

Source: EIA

US Energy Market Update

A summary of recent changes and important information about the US energy markets.

• Our leading story is of course the eye-watering results of PJM’s most recent capacity auction, released on July 30. Consumers across the territory will pay $14.7 billion for capacity in the 2025-2026 delivery year, the highest yearly sum ever, and up from $2.2 billion in the previous auction. See below.  
• The natural gas market found some support in early August as traders reacted to a few consecutive weeks of lower-than-expected injections into national inventories. Since August 1, NYMEX gas rallied by 4% on the 2025 strip and 9% on the spot.
• Weather is the dominant driver in the near term. S&P reported that gas demand increased 5.6% last week from the week prior due to widespread heat.
• Nonetheless, JPMorgan recently slashed its 2025 Henry Hub price forecast, from $4.30 to $3.70/MMBtu to reflect “dominating fears of production and a lack of weather demand” as well as the more “wait and see” posture of many gas buyers. It seems that many market participants are growing skeptical of near term price increases, as they reasonably should be–they simply have not materialized as most banks and analysts have projected.
• As expected, spot prices followed the temperatures higher in July, particularly in the West Coast and Northeast. Still, we haven’t seen any of the major power indices pass through the $50/MWh monthly average price threshold. It seems likely that spot rates will begin to moderate with cooling temperatures across most US markets. 

• LNG exports were markedly bearish in July. US LNG exports dropped 5% year-on-year to 708 million mt in July, the lowest export volume for the month since 2022. This decline is largely attributed to decreased exports to Europe and Latin America, and the shutdown of the Freeport facility due to Hurricane Beryl.
• Regional LNG Export Trends:
  • Europe: Exports to Europe decreased for the fourth consecutive month, down by 600,000 mt in July. Inventories across Europe are also strong and near the five year maximum for this time of the year.
  • Latin America: Exports to Latin America fell by 25% from the previous month.
  • Asia: Contrarily, exports to Asia surged, reaching 3.29 million mt, the highest since June 2021.

PJM’s Shockingly Expensive New BRA

The results of PJM’s recent capacity auction for the period June 2025 to May 2026 are a massive cost increase for all customers in the region and signal a major shift in the nation's largest electric grid. 

• In our last newsletter  we discussed the regional transmission operator (RTO) PJM’s upcoming Base Residual Auction (BRA) which was established to secure sufficient electricity generation capacity to meet future electricity demand of the region. Although we correctly predicted that the future price for capacity would clear at a higher rate than the last few auctions - due in part to PJM’s recent market reforms - all market participants undershot the magnitude of the new clearing price.
• On July 30th, PJM announced that the clearing price for 2025/2026 had skyrocketed to $269.92/MW-Day, an unexpected 833% increase from the previous year's $28.92/MW-day (see historical BRA results posted below). This surge signals a significant shift in the region's energy landscape predicated on a combination of regulatory changes and the region's evolving energy generation mix. Stock prices of major energy producers in the region surged by over 10% on the news.

PJM Base Residual Auction Results - RTO, Delivery Years 2018-2026

Source: PJM

• The auction results revealed a mismatch between supply and demand. A substantial 6,600 MW reduction in offered generation, coupled with a 3,243 MW increase in projected peak demand, has created a significantly tighter market after years of supply surplus. The rate increase affects all of PJM however the squeeze is particularly acute in certain areas, with Baltimore Gas and Electric and Dominion regions approaching their zonal price caps averaging ~$455/MW-day.
• The auction results brought to light several critical challenges facing the PJM region. The reserve margin has tightened to 18.5%, down from 20.4% previously, leaving less room for error in meeting peak demand. Moreover, approximately 38,000 MW of resources remain stuck in the interconnection queue, underscoring the difficulties in bringing new capacity online despite clear market signals for additional supply.
  

  Cleared MWs (UCAP) by New Generation/Uprates/Imports by Delivery Year

• Commercial and industrial customers can expect incremental cost increases ranging from $0.021 / kWh in most of the RTO to $0.035/kWh in the locational deliverability areas (LDAs) of Baltimore Gas and Electric and Dominion which are facing even greater supply shortages.
• There will likely be intense discussions about market design, regulatory frameworks, and investment strategies to address both short-term reliability concerns and long-term sustainability objectives by stakeholders across the PJM network. And the next BRA is scheduled only a few months away in December 2024 for the 2026/2027 delivery year. Our initial consensus is that BRA prices are likely to remain elevated in 2026/2027 as there is insufficient time for supply to react. The market changes implemented by PJM in 2024 are the key driver in the systemic change to market settlement. As a result of the December 2022 Winter storm, during which a huge portion of PJMs capacity resources failed to perform, PJM administratively derated capacity accreditation across most of its fleet. Unfortunately this has coincided with a period of rapid demand growth from datacenters, as well as delayed timing of the BRA auction cycles.    
• The upcoming auction will be closely watched by your energy advisors at Veolia as well as other market participants and regulators. In the meantime, please contact your advisor to discuss how and if it makes sense to hedge your future capacity obligations in the region. 

Power Sector Adapts to Policy, Demand Growth and Climate Challenges 

Extreme weather risks, rising demand, and regional policy initiatives are coming to a head as grid planners struggle to keep up

• The last decade has seen a notable uptick in the frequency and severity of extreme weather events. From the devastating fires in the West to ice storms in Texas, the toll that these events have taken on the power grid are staggering.
• Aside from weather challenges, grid planners are already struggling to accommodate the growth from data centers and EV charging. Boston Consulting Group projects loads attributable to data centers are projected to grow by 60-90 gigawatts by 2030, powered mainly by the integration of AI into nearly every aspect of computing.
• Additionally, EV mandates on new sales in states such as New Jersey, New York, and Massachusetts are expected to place heavy demand on ISOs’ aging infrastructure.
• Add to this the growing costs and complexity associated with meeting 2030 renewable energy goals and consumers should anticipate that the next five years could be dramatically different than the last.
• Look no further than PJM’s most recent capacity auction, which resulted in a clearing price 833% higher than the previous year – for evidence that significant cost increases will be incurred over the next few years, even in the largest and most dynamic power grids.
• How are ISOs strategizing for this needed capacity?
  • MISO is spending over $20 billion to expand their existing regional transmission system. They are also keen on building out a regional transmission network, evidenced by their request to FERC to approve a joint interconnection deal with its neighbor, the Southwestern Power Pool. MISO’s most recent capacity auction employed a new methodology of valuing generators.
  • ERCOT is considering increasing transmission line voltage capacity from 345 kV to 500 or 765 kV systems. Furthermore, they plan to expand a multi-billion dollar program that reserves private backup generators for emergency capacity during demand response events.
  • PJM is strengthening its Regional Transmission Expansion plan after green-lighting 7 new baseline reliability projects last week. Overall, the plan aims to bolster grid reliability by adding higher capacity transmission lines, upgrading breakers, and canceling projects no longer necessary given generator withdrawals. The region may very well see new thermal generation as a result of the most recent capacity market auction trends. 

Offshore Wind Update

Source: E&E News

Vineyard Wind 1 Halted After Blade Snaps

• Last month, a blade from an offshore wind turbine belonging to the Vineyard Wind 1 project broke off and fell into the ocean off of the coast of Cape Cod.
• As a result, the U.S. Bureau of Safety and Environmental Enforcement issued a suspension order that brought project operations and construction to a stop while the cause of the breakage is investigated.
  The fiberglass debris from the 107-meter long, GE-Vernova-manufactured blade began washing up on Nantucket shores on [timing]. Turbines of this size have a nameplate generation capacity of about 12 MW.
• While construction has since resumed, the suspension order mandates that the entire project stop generating power while the cause of the breakage is investigated. This translates to less power being delivered to the New England grid during summer hours when the grid experiences its highest demand.
• As the cause of the breakage is under investigation, tensions are high in coastal Massachusetts towns. The state and residents allege that Vineyard Wind waited too long (48 hours) to inform them of the situation offshore.
• The event comes as a blow to the offshore wind industry in the United States as it fuels concerns from locals and politicians opposing the installation of offshore wind near their towns/districts. The construction itself has been painfully slow and costly, which could further drive up future bid prices. 

New York PPA Activity

• In June of this year, New York reapproved new pricing from the Empire Wind and Sunrise Wind projects. 
• Both Empire and Sunrise filed to renegotiate contracted prices at the end of 2023, which the New York Public Utilities Commission rejected. After rebidding in New York’s fourth offshore solicitation, the projects were selected early in 2024 and pricing was finalized at $155/MWh for Empire and $146/MWh for Sunrise.
• The new pricing reflects price increases of over 30%. Price adjustments have become the new norm after Commonwealth Wind became the first project to attempt to renegotiate contract pricing at the end of 2022.

Summary of OSW Project Status

Source: S&P

• With only three projects operational, the sector finds itself in a state where contract renegotiations have become the norm, while smooth-sailing projects remain the exception.
• Several major ventures with significant generation capacities, including Commonwealth Wind and Mayflower Wind in New England, are currently in the process of rebidding for higher prices.
• Economic headwinds, fueled by inflation and high interest rates, have battered the industry. Even among projects that have made progress, setbacks persist. The recent breakage of a Vineyard Wind turbine blade serves as a stark reminder of the challenges that continue to plague the sector, further dampening its already tepid momentum.
• Veolia will continue to monitor and report on the progress—or regression—of these projects along their development path.

Getting Tough: Standards in Voluntary Carbon Markets

Recent developments underscore the limitations of current carbon regulations, consequently initiatives are emerging aimed at enhancing the quality and credibility of carbon credits. 

• The voluntary carbon market, which allows companies to buy carbon credits to offset their emissions, has faced criticism for not always ensuring that these credits truly represent real reductions in carbon emissions. Recently, the Integrity Council for the Voluntary Carbon Market (ICVCM) decided that carbon credits issued under current methodologies used to develop renewable energy projects would not meet its Core Carbon Principles (CCP) label standards. The concern is that these projects might have been completed even without the financial boost provided by selling carbon credits. This raises doubts about whether these credits are actually contributing to additional carbon reductions.
• Only a small fraction—just 3.6%—of the market’s existing carbon credits met the high standards required for the CCP label. This situation highlights the need for more stringent rules to ensure that carbon credits are genuinely effective in reducing atmospheric carbon. ICVCM’s decision is seen as an important step toward rebuilding trust in the voluntary carbon market, especially as companies increasingly depend on these credits to help meet their climate goals when they can't reduce their emissions directly.
• Additionally, the launch of the Carbon Removal Standards Initiative (CRSI) marks another pivotal moment in the push for higher standards in carbon regulation. CRSI aims to provide policymakers and regulators with independent, science-based advice on developing robust standards for carbon removal. By focusing on the quantification and verification of carbon removal efforts, CRSI seeks to bring greater transparency and accountability to the process, ensuring that carbon credits genuinely reflect the removal of carbon from the atmosphere. This initiative addresses a critical gap in the current carbon market: the lack of standardized, science-based criteria for carbon removal projects.
• For now, these updates likely won’t affect existing North American carbon projects, but more initiatives tightening the integrity of the VCM are sure to come. Importantly, the CSRI and ICVCM’s spotlight on additionality (i.e. asserting that marginal emissions reductions are occurring as a result of the project) signals a greater trend toward strengthening the credibility of carbon accounting and stakeholder impact.

Market Data

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