Energy Market Update: July 11, 2019

PJM is the largest deregulated Regional Transmission Organization (RTO) in the United States. This year has brought a buyer’s market to PJM, but thanks to nationwide trends, the best may be yet to come. Allow Direct Energy Business Strategist Tim Bigler to explain in this week’s Energy Market Update:

Let’s go back in time. A year ago, in July 2018, PJM peak electricity embarked on a gradual ascent which saw them crest over the $39/Mwh threshold in January 2019, ahead of an expected cold winter. The winter freeze, however, tapered off fairly quickly and temperatures in April and May 2019 were unexpectedly warm – some of the warmest we’ve seen in this region during these months. Power prices responded by dropping – first measuredly, then precipitously – toward the end of May. As prices fell, volume spiked, indicating more aggressive seller behavior.

Weather wasn’t the only factor influencing these prices. Macro trends are also at play, including the construction of new power plants, the growing role of shale, and natural gas’s newfound popularity as an electricity source. These trends happen to lead to increased supply and improved efficiency, both of which drive prices down.

Prices stopped their downward skid (for the time being, at least) in the beginning of July, rebounding almost $2.50/Mwh, up from the year-to-date low of about $30.50/Mwh from the end of June. Is that price a floor? Possibly, but there’s no denying that peak electricity prices are low right now, relative to the recent past.

Shrewd buyers must be wondering, given our working theory behind the recent price drop, whether prices could sink even lower in the coming months. Some evidence may support such a scenario; in particular, many new combined-cycle gas-fired electricity generation plants are exhibiting a superior heat rate, which could make turning gas into electricity even cheaper.

For example: if a plant with a burn rate of 10,000 btu/Kwh burns gas that is priced at $3/Mmbtu, the resulting electricity price is around $30/Mwh (close to the potential price floor we saw in June). However, today’s state-of-the-art combined-cycle facilities, which run around-the-clock and capture displaced heat to produce additional output, can exhibit heat rates as low as 6,500 btu/Kwh. The same $3/Mmbtu gas, burned in one of these new plants, would (theoretically) result in $19.50/Mwh electricity.

No one expects prices that low, but it is worth keeping in mind the effect that these new plants could ultimately have on prices.