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Energy Market Update: May 14, 2019

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It’s common knowledge that electricity demand tends to peak during July and August. Electricity suppliers, of course, factor this into pricing. However, it’s not always a simple formula; this week, Direct Energy Business Strategist Tim Bigler contemplates why prices have behaved somewhat unexpectedly in some regions this year, and offers some thoughts for buyers on the coming summer.

 

If we look at peak electricity prices for July and August of 2019 across the PJM region (the West Hub, JCPL, and Met-Ed zones, specifically) over the last year, we can see that they followed a pattern. Prices stayed relatively stable until October 2018, at which point they began to climb before peaking around New Year’s Day. They have since fluctuated greatly, but have generally trended downward, and even experienced a particularly dramatic drop in April. Today, peak electricity prices for July and August of 2019 are at or near one-year-lows, which could signal a buying opportunity for anyone open to a fixed price product.

That’s good to know. However, to better understand why prices are behaving this way, we ought to look at the supply side of the equation. According to the EIA’s Electric Power Monthly, a substantial number of new plants, many with a capacity greater than 1000 MWs, are planned to come online between now and February 2020. A handful of these plants are natural gas power burn facilities, which is significant for two reasons.

For one, it means that they take advantage of inexpensive natural gas costs to generate electricity cheaply; for another, it means that they take advantage of technological improvements to create more electricity using less gas, compared to older plants. Whereas older plants had a heat rate of around 9,000, modern plants that replace them have a heat rate of around 7,000. This means that the amount of gas modern plants need in order to create the same amount of electricity is much reduced. Our educated guess is that the introduction of these new plants into the grid is having a greater-than-expected downward pressure on summer electricity prices in many areas.


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Posted: May 14, 2019

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