Shooting Stars - The End of EnergyStar?

Energy Markets Update

In this newsletter, we cover key factors impacting US energy markets.  This week, we cover drilling activity and capacity market updates in the U.S. We report on the proposed federal budget cuts potentially impacting the energy sector, as well as Spain and Portugal's unprecedented power outage, 

Table of Contents

• Market Update
• Drill Sergeants Order To Hold The Line @ 104 Bcf / day
• Capacity News: MISO Auction Results, PJM Regulatory Changes, ISO-NE Delays
• Federal Update: What’s reNEWable?
• Blacking Out On A Monday Afternoon
  

Weekly Natural Gas Inventories

Source: EIA

Source: EIA

Market Update

• After a significant retreat through much of April, gas markets came roaring back last week with NYMEX strips for balance of 2025, 2026 and 2027 adding 17%, 7.5%, and 3.5% respectively over the past 2 weeks. 

Data source: Argus

• The market is currently balancing two competing narratives: (1) will the US enter recession by early next year, and (2) to what extent will US oil and gas drillers pump the brakes on near term investments (hint: see next piece)? As fears of a recession weigh on near term prices, these are also counteracted by the supply side response. 
• On one hand, US production remains stable around 104-105 bcf/d and we are tracking  the 5-year average inventory level. Furthermore, the threat of recession could very reasonably result in near-term demand destruction. On the other hand, demand for gas is substantially higher year-over-year. There are very real sources of additional demand emerging over the next few years in AI datacenters and LNG export projects. Also there are no glaring alarms of a pending recession, and in the absence of a recession, we would almost certainly be heading into a short squeeze if supply does not build rather rapidly by early next year. The prolonged lack of certainty about the direction of the economy makes this scenario more likely as time goes on. 
• The price of WTI crude oil traded below $60 bbl this week, another indication of weak economic expectations. This is also supportive of natural gas prices (again, see next piece).
  Data sourced from various ISOs. 

Drill Sergeants Order To Hold The Line @ 104 Bcf / day

Drilling activity has decreased with oil and natural gas operations down a combined 21 rigs versus last year. The decreases reflect producer caution and capital discipline in response to demand/price uncertainties, and the market has taken notice. This week, we’ll take a closer look at the interplay between rig counts, production, and wholesale gas costs.

• Last December, S&P analysts predicted that softening oil costs per barrel could benefit natural gas suppliers in 2025. With lower WTI crude oil futures prices, producers would reasonably slow drilling operations, which would also keep the natural gas produced as a byproduct of oil drilling, known as associated gas, in the ground as well. 
• Exploration and production companies (E&Ps) have plans for this selloff of oil. On May 6th, executives at Coterra Energy announced that they would reduce drilling activity in the oil-heavy (wet) Permian Basin and focus their efforts in the more dry gas-rich Marcellus Shale. The following day, Gulfport Energy announced its own shift to 20% more natural gas production over oil in different plays across the US, according to S&P Global Insights.
• The overall rig trend in the E&P sector has decreased in 2025 with oil rigs down 20 and gas rigs down 1 versus last year. See chart below highlighting total U.S. rig counts over time.

• Noting that the majority of the rig count loss was on the oil side and that natural gas production has increased to all time highs -  104.1 Bcf/day from 100.8 Bcf/day Y-O-Y to be exact. It may then be confusing why prices at the NYMEX remain supported at the $3.46 - $5.12/Dth level according to S&P Global Insights. It appears that even though domestic gas production is at all-time highs, it's also unfortunately plateauing here between 104-105 Bcf/day. 

• Looking above at the green line of EIA’s projection for net trade, E&Ps, analysts, and buyers can all see that even with shifting strategies in where to drill, the E&Ps are holding the line on production, which isn’t the ideal line for buyers.

Capacity News: MISO Auction Results, PJM Regulatory Changes, ISO-NE Delays

While always the subject of fervent controversy, capacity markets have been mostly boring for most of the past 10 years. That dynamic has shifted in the recent years as supply is gradually becoming short and prices are quickly becoming unaffordable .This article provides an overview of key capacity market activity, including YoY price trends by RTO, recent regulatory updates and their implications for end-users.

• With Summer around the corner signaling the start of a new capacity year in most RTOs, electricity providers will begin incorporating rate changes for delivery year 2025-26 into a new capacity charge paid by their electric customers starting June 1st (May 1 in New York). In PJM and MISO, the capacity line item may come as a shock to customers who will begin experiencing the cost impact of recent and historic capacity auctions.

Source: Veolia

• In past newsletters, we’ve reported on PJM’s devastating BRA results for the upcoming capacity year (2025-26), which saw clearing prices increase 833% YoY. This was due to several factors, including demand growth from data centers, retirement of baseload thermal plants and replacement with intermittent energy sources, and delays in development of new generation and transmission lines. 
• Many of our clients have since wondered what the cost impact of this auction will be come June. For perspective, capacity has typically comprised 6-8% of total electric supply costs in PJM. Now, this will increase to 15-20%, which translates to a $0.012 - $0.022/kWh increase for a retail customer. Rate increases in some PJM utility zones are upwards of the 20% range.

Source: Veolia

• Following the BRA, PJM delayed future auctions and has taken steps to reform the auction rules with the goal of preventing even more exponential increases. Left unchecked, some analysts were projecting clearing prices upwards of $700/MW-day. FERC subsequently approved PJM’s proposed rule changes for the upcoming two auctions (delivery years 2026-27 and 2027-28), adopting a $325/MW-day price cap and $175/MW-day floor, unquestionably better than $700 but expensive nonetheless. 

• Both auctions will also include generation capacity from two Reliability Must Run (RMR) fossil fuel plants, Wagner (843 MW oil-fired) and Brandon Shores (1289 MW coal-fired). The exclusion of critical RMR Plants in PJM’s previous capacity auction heavily contributed to the price increases we saw by limiting available capacity in the market.
• It’s important to convey that PJM’s 2025-26 auction was not a fluke - but rather an indicator of broader trends to brace for across all RTOs. Many of the fundamental drivers behind PJM’s price increases– exponential load growth, supply constraints & faltering infrastructure – are persistent issues everywhere.
• This was abundantly clear after MISO recently published results to its Planning Resource Auction (PRA) for the 2025-26 delivery year. Last year, customers in Missouri Zone 5 had a taste of capacity sticker shock, due to an alarming lack of capacity in this area leading to a $720/MW-day clearing price. You can read our in-depth analysis about the factors contributing to this here.
• For the upcoming capacity year 2025-26, the most recent auction saw alarming cost increases across MISO, with summer capacity clearing at $666/MW-day in all zones – up 20x year over year for most customers.
• We are closely monitoring ISO New England and NYISO capacity markets where we expect similar trends to emerge in coming years. It’s worth noting that ISO-NE has announced fundamental changes to its capacity market structure starting in 2028. Instead of auctions being held three years in advance, ISO-NE is transitioning to a prompt auction, similar to MISO. The grid operator claims that this timeline will help to better address supply and demand challenges in real time, rather than forecasting several years in advance. The proposed changes will also place an emphasis on incorporating intermittent / renewable energy sources, which are becoming a growing share of the generation mix. 
• While it’s inevitable that capacity costs represent a larger portion of our energy costs over the coming years, there are some opportunities to mitigate and manage these costs. Now more than ever, participating in Demand Response / load curtailment programs could help lower your capacity tags and reduce capacity costs for future years. For larger energy buyers who competitively shop for their electricity suppliers, it’s also important to select products and contract structures that give you full opportunity to take advantage of curtailments.
• Veolia’s energy markets advisory team specializes in helping our clients manage costs of the various cost components on your electric bill, including capacity. For more information feel free to contact our team: commodity@veolia.com

Federal Update: What’s reNEWable?

2026 Budget Reveal

On May 2nd, The White House released their 2026 budget proposal, with a base non-defense discretionary budget authority of $163 billion, a 22.6% reduction below current-year spending. This upcoming budget is seeking some drastic changes in energy-related offices and programs:

• A 55% budget cut for the EPA ($9.1 billion to $4.2 billion)
  • This includes potentially ending the widely popular and successful Energy Star program, which has helped consumers save more than $500 billion in energy costs and 5 trillion kWh since its launch in 1992. More than 1,000 companies and organizations lobbied EPA to maintain the program, and the program has more than 16,000 participating companies and organizations, including over 1,800 manufacturers, who rely on the Energy Star program “to drive consumer demand for energy efficiency.”
• A 9.4% decrease to the DOE budget, including:
  • The cancellation of over $15 billion in funds through the Infrastructure Investment and Jobs Act (IIJA). The programs aimed towards grid resiliency, reliability, and flexibility; transmission upgrades; and incentivization measures for nuclear and hydroelectric generation projects.
  • A $2.57 billion decrease to the Energy Efficiency and Renewable Energy (EERE) budget
  • A $260 million decrease from the DOE’s Advanced Research Project Agency. Since it was established in 2009, ARPA-E has led research resulting in major gains in solar efficiency, biofuel production, and energy storage.
  • A cut of $1.15 billion from the Office of Science, specifically reducing funding for climate change and research. The budget allows for investment in high-performance computing, A.I., quantum information science, fusion, and critical minerals.
  • The Office of Nuclear Energy would see a budget reduction of $400 million to end non-essential research on nuclear energy. The Office of Fossil Energy would receive a budget cut of $270 million and be focused on research of technologies that could produce an abundance of domestic fossil energy and critical minerals. 

Source: EIA, The U.S. operates the world’s largest nuclear power plant fleet

• We mentioned in a previous newsletter that the Low-Income Home Energy Assistance Program (LIHEAP) received significant staffing cuts, and this new budget follows suit with their budget, proposing the elimination of $4 billion in annual funding.
  • While the program reports providing heating and cooling assistance to about 6.2 million low-income households, the motive for this budget cut is “because states have policies preventing utility disconnection for low-income households, effectively making LIHEAP a pass-through benefitting utilities in the Northeast,” as well as concerns for the accuracy of qualifying recipients through the program. 

Challenges Loom for Wind Development

• Dominion Energy’s CEO Bob Blue announced to investors that they have been charged $4 million in tariff costs on their 2.6 GW Coastal Virginia Offshore Wind project since the new tariff policy was enacted. If the current policy persists through the project’s anticipated completion in late 2026, tariffs will add about $500 million to the project’s cost. The project is still anticipated to reach completion on time.
• On April 16th, the Trump administration ordered a stop to Equinor’s construction of an 810-MW Empire Wind 1 project being built offshore New York.
  • The project was fully permitted in 2024, and Equinor reached financial close in January of this year. The project is expected to be complete in 2027.
  • Department of the Interior Secretary Doug Burgum told the Bureau of Ocean Energy Management (BOEM) that the project was “rushed through by the prior administration without sufficient analysis or consultation among the relevant agencies as relates to the potential effects from the project.”
  • NY Governor Kathy Hochul plans to combat this stop work order, and Equinor CEO announced that he believes this move by the government is unlawful. 
    The project has the potential to deliver power to half a million New York homes, and is currently about 30% complete.

Blacking Out On A Monday Afternoon 

Reviewing the outages that disrupted the lives of millions in Spain and Portugal last week. At this point, we’re not sure which part of the story is more concerning - that authorities at Red Electrica, Spain's largest affected utility, still don’t know what caused the drop - or - how far behind the EU is in infrastructure investments, by their own admission.

• Power failures cascaded across Spain and Portugal on Monday, April 28th, representing one of the most significant grid disruptions in recent European history. 60 million people across the two countries were affected by this 18-hour blackout. See map below provided by Red Eléctrica.

Source: Red Eléctrica

• Spain's renewable energy grew from 25% to 50% over 15 years. The Iberian Peninsula functions as an 'energy island' due to limited connections with neighboring countries, making it vulnerable to grid instability. On April 28th, unexpected solar plant disconnections in southwest Spain caused a significant capacity drop that overwhelmed grid safety systems, suggesting deeper systemic issues.
• Perhaps more alarming is that this triggered an unexplained trip of 15,000 MW of generation in just 5 seconds, according to early reports. 
  
•  
• Several critical questions remain unanswered about the incident, including the cause of the initial capacity drop and why multiple grid protection systems failed simultaneously.
• Since the expedited dismissal of solar flare theories and interconnection issues with the grid in France only deepens the mystery, the search for answers may ultimately point to antiquated energy infrastructure.
• Last year, European firms increased investments in grids from €50-70 billion to €80 billion ($90.5 billion). The European Commission has estimated Europe needs to invest $2.0-2.3 trillion in grids by 2050 in order to adequately upgrade power networks across the continent (see chart  below).

Data sources: Bruegel | The European Commission

Market Data

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