Energy Markets Update

In this newsletter, we cover key factors impacting US energy markets, with a focus on PJM capacity market changes, the projected 2024 increase in IRA tax credits, winter readiness, and US utility reliability metrics.

Table of Contents

• Gas & Power Update
• PJM Mulls Capacity Market Changes
• IRA Tax Credit Transfers Could Reach $25 Billion This Year
• NERC’s Assessment of Winter Readiness
• Reliability Metrics Across Major US Utilities

Weekly Natural Gas Inventories

Source: EIA

Source: EIA

US Energy Market Update

A summary of recent news in wholesale power and gas markets.

• NYMEX natural gas posted its largest gains in months over the past 24 hours as the December prompt month surged over 40 cents (+13%) from yesterday’s open into today.  Prompt gas has increased 50% month-over-month, from $2.26 per MMbtu on October 18 to over $3.40 today. Most of this movement is seasonally routine as we transition into the heating period, however it is a reminder for gas buyers that while you’re sitting on the floor, the path upward is always more dramatic.  
• Conversely, winter basis markets have declined month-over-month as moderate weather and steady production has left the country in a comfortable storage position. The premiums on November and December flows collapsed under their own weight. The nation sits precisely on 4.0 TCF in gas storage as we exit the injection season, 6% above the five-year average and 11% above the five-year low.
• Power rates have been following a similar path with little movement in the 2025 strip and modest increase in the outer years, 2026 and beyond.
• Despite low prices today, we are becoming increasingly concerned about the coincidence of prospective load growth over the next five years, and development of the LNG export industry in the coming years. Our view is that gas buyers with a longer term horizon may do well to take positions on cheap gas through the end of the decade. Opportunities in power markets are less obvious, but we believe the risk here may be even more severe, particularly in capacity markets. 
• COP29, the UN’s annual climate conference, comes to an end tomorrow in Baku, Azerbaijan. The conference has been overshadowed by calls for faster progress on greenhouse gas emissions reduction, and criticism of the host country.

PJM Mulls Capacity Market Changes

In response to the significant increase in capacity prices for PJM's 2025/2026 delivery year, and the subsequent public uproar, the grid operator is actively developing modifications to the upcoming capacity auction rules aimed at addressing stakeholder concerns. Many of these have the potential to lower the next auction price. 

• As a refresher, the last auction for PJM's 2025/2026 delivery year cleared at $269.92/MW-day for much of PJM's service territory, a nearly tenfold increase from $28.92/MW-day for the 2024/2025 auction. The auction results revealed a tightening market in PJM, with supply decreasing by 6,600 MW and projected peak demand increasing by 3,243 MW. This shift has reduced the reserve margin from 20.4% to 18.5%. Despite clear market signals for additional supply, approximately 38,000 MW of resources remain stuck in the interconnection queue, highlighting challenges in bringing new capacity online to address the supply-demand imbalance.

• PJM's capacity price surge resulted from several key changes: switching the reference resource to a more expensive combined-cycle unit,  derating gas plants to reflect lower reliability during extreme weather, implementing FERC-approved market reforms for improved reliability risk modeling, and revising capacity accreditation methods. These administrative modifications, aimed at enhancing system reliability and accurately valuing resources, collectively tightened the supply-demand balance and drove prices higher.

• The ensuing price surge prompted a parade of stakeholders to file complaints, including environmental groups that blamed the high prices on market rules that failed to consider the capacity contributions of generation resources scheduled for retirement but remaining in operation as reliability must-run (RMR) units. Brandon Shores and Wagner have a combined nameplate generation capacity of over 2,000 MW.

• Earlier this month, PJM obtained approval from FERC to delay its next capacity auction by six months. Originally scheduled for December, the auction will now take place in June 2025. This extension allows the ISO additional time to implement revisions to capacity market regulations contributed to the recent price surge. The next three auctions will follow this delay.
• In the June 2025 capacity auction, PJM is considering several changes to its capacity market in an effort to address recent price spikes and improve overall market efficiency:
  • Reverting to using a combustion turbine as the reference point for calculations, which would likely result in a less steep demand curve and potentially lower, more stable capacity prices as quick-to-start combustion turbines have lower capital costs and are less sensitive to changes in energy market revenues compared to combined cycle plants.
  • Standardizing penalties for non-performance across the entire PJM territory by setting a minimum penalty rate, thus creating a more equitable market environment and encouraging reliable performance from all market participants.
  • Reintroducing certain power plants in the capacity market that were previously excluded. These are plants that were scheduled for retirement but continue to operate for reliability reasons. By allowing these "reliability must-run" units to participate, PJM could increase the overall supply in the market, potentially exerting downward pressure on prices. If approved, this would likely be the most consequential change. 
  • Using the revenue generated from these newly included plants to offset some of the costs associated with keeping them operational.

• FERC acknowledged that while the six-month postponement could have unforeseen effects, the benefits of delaying the auctions outweigh any potential harm. The commission found that PJM was acting responsibly in seeking this delay to adjust market rules.
• We will continue to advise as the ISO lands on new rules for the next capacity auction.

IRA Tax Credit Transfers Could Reach $25 Billion This Year

The Inflation Reduction Act' provisions for tax credit transfer transactions is reshaping the market for clean energy finance. Recent developments indicate that these transactions could surge to as much  as $25 billion this year.

• A mid-year market intelligence report by Crux, a finance technology company that facilitates the connection between tax credit buyers and sellers, reported this acceleration. In 2023, the total transfer activity amounted to $9 billion, but the first half of 2024 alone has already seen transactions totaling between $9-11 billion. The increase was bolstered by the IRS's final guidance on the tax credit transferability mechanism in April, which clarified several key guidelines and streamlined processes.
• Several factors contribute to the bullish outlook for 2024. Crux highlights the impact of macroeconomic factors like interest rates, the election, and potential tax legislation in 2025. Additionally, the market has responded positively to the IRS’s efforts to increase accessibility to clean energy tax credits for direct-pay-eligible entities such as local governments, public school districts, churches, and hospitals.
  
  • These entities are now more equipped to jointly invest in clean energy projects, a development bolstered by the IRS's clarification that co-owned projects can elect not to be treated as partnerships for tax purposes. This flexibility allows eligible entities to take full advantage of direct pay for their portion of the project while their partners can use the transferability option.
• The Crux report is optimistic about continued growth, expecting the total deal volume for the year to reach between $20 billion and $25 billion. The market's expansion has been driven by a diversity of technology investments and a consolidation of prices, especially for individual credits such as the Section 45X advanced manufacturing credit.
• Looking forward, the sector anticipates further enhancements in transaction efficiency, reducing the friction in tax credit deals and potentially streamlining the process even more. This is crucial as the market adapts to accommodate the increasing supply expected over the coming years.
• The increase in tax credits not only highlights the increasing shift towards sustainable investment but also underscores the vital role of governmental policy in facilitating and accelerating these changes. As we move towards the end of the year, the industry will of course be following any signaling from  the incoming Trump administration, however the most critical clarifying guidance from the federal government, namely the IRS, are now in place.

NERC’s Assessment of Winter Readiness

Last week, the North American Electric Reliability Corporation (“NERC”) released its 2024-25 Winter Reliability Assessment, which underscored the potential for reliability issues and regional risks to the North American power grid this winter.

• The report emphasizes a few serious concerns, namely that freezing temperatures will impact the delivery of natural gas to power plants. Recent examples of this scenario played out during Texas’ Winter Storm Uri (2021) and then Elliott (2022) in the Eastern US, in which freezing temperatures resulted in many energy shortfalls, including producers' inability to supply gas to power generation facilities.
• The report also points out the hit that transmission systems sustained during the 2024 hurricane season – namely from Hurricanes Helene and Milton in the Southeast. These events caused significant damage to hundreds of transmission lines and substations alongside millions of customer outages.
• Natural gas supply to electric generators remains vulnerable in extreme conditions throughout much of North America, but these are accentuated in PJM and ISO New England. 
• Adding to these concerns is a recent legal dispute over the Transco Regional Energy Access (REA) natural gas pipeline project, impacting numerous Mid-Atlantic and Northeast states. Approximately half of the project's facilities, operational since October 2023, had been operating toward the project’s end-goal of increasing gas delivery capacity by 830k Dth-d – mainly within the PJM region. With the status of this project now in flux, there’s a growing risk that the demand for natural gas to ensure electric reliability may exceed the current and planned pipeline capacity, potentially leading to supply shortfalls during peak winter demand.
• While the natural gas industry has made some progress improving winter preparedness – generator weatherization efforts for example – there is concern that similar steps have not been adequately taken in other regions. A common gap in most regions is that while RTOs and regulators may have responsibility for reliability of power plants, they have no authority over the reliability of the gas transportation system, which is inextricably linked. 
• Beyond the threats posed by inadequate natural gas supply and infrastructure behind power generation, NERC also assesses the impact of winter load growth from heating demand, data centers, and transportation systems, concluding that serving winter load will be far more challenging as older gas-fired generators are replaced with variable intermittent resources.

Reliability Metrics Across Major US Utilities 

• Widespread power outages have become increasingly prevalent across the United States, affecting millions. Recent examples include Hurricane Milton's impact on Florida (3 million homes and businesses), and the extensive disruptions caused by winter storms Elliott (1.6 million) and Uri (5 million) in PJM and Texas, respectively. In response, ISOs and RTOs have begun investing heavily in grid resilience, inevitably passing costs to consumers.
• Given the ubiquitous nature of these risks, it may be worthwhile to assess the financial impact of such outages on your operations and develop contingency plans for both 2025 and the latter half of this decade. 
• To assist business leaders in quantifying operational disruptions and financial impacts, we've analyzed the regions of the US most susceptible to power outages. Our examination leverages a key metric from the U.S. Energy Information Administration's (EIA) annual reports and the System Average Interruption Duration Index (SAIDI). 
• Below is a summary of the least reliable investor-owned utilities (IOUs) in 2023:

System Average Interruption Duration Index (SAIDI): Measures the average number of minutes of non-momentary power interruptions per customer per year
System Average Interruption Frequency Index (SAIFI): Measures the average number of non-momentary power interruptions per customer per year.

Source: EIA

• Analysis of the EIA 2020-2023 dataset reveals significant disparities in outage frequency and duration across utility networks. If your utility appears on this list, or if you've experienced notable service interruptions, it may be worthwhile to explore strategies for enhancing operational resilience. Our team can provide insights into potential solutions tailored to your specific circumstances, leveraging current technologies and innovative approaches to mitigate the impact of recurrent outages on your business operations.

Market Data

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