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Summer Energy Outlook 2019: Prices

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This video is a recorded excerpt from a live webinar on April 16, 2019.

It’s tempting to treat past trends like a crystal ball. What we learn by comparing different markets, however, is equally valuable, and allows for strategy based on granular comparative data rather than speculation. Today, we’ll do just that by comparing two of the biggest energy markets in the country.

NYISO Zone J

Trends aren’t always reliable indicators, but when it comes to around-the-clock forward power prices in New York City (aka, NYISO Zone J), history has much to teach us.

When we compare forward electricity prices for 2022, 2021, 2020 and 2019, the same pattern holds across all four years: prices were stable — and exhibited low spread between years — until about May 2018. Some might even say they were dropping gradually. However, in May 2018, the New York Department of Environmental Conservation proposed a measure that would embed the “social” cost of carbon into energy for consumers. The earliest this measure is expected to go into effect would be 2021, but it turned the markets on their heads nonetheless.

Prices spiked, thanks in part to the city’s proposal. The farther out the price, the higher it spiked, as the proposal is more likely to go into effect as time goes on. At the end of last year, forward prices for 2019 also saw a spike,which was bad news for many customers hoping to lock in a fair price before the new year.

Today, forward prices through 2020 are still higher-than-average in terms of percentiles — which makes sense given how much time prices spent in “cheap” territory — but in absolute terms are much closer to recent lows than they are to recent highs. In other words: when compared to historical costs in general, today’s prices seem high, but when compared to the behavior of prices since the NYISO carbon proposal, they are in fact fairly low. (And keep in mind: today’s prices for 2021, 2022, and 2023 are high, no matter how you slice it.)

PJM ComEd

Let’s compare the NYISO situation to what’s happening in PJM.

PJM’s ComEd (covering Metro Chicago) saw forward prices quite stable until about April 2018, when prices farther in the future (2021 and 2022 prices, in particular) saw a drop which separated them from nearer-term contracts. One hypothesis for this behavior is the expected introduction of new pipelines, which would bring cheap shale gas into ComEd from the west, increasing supply. In contrast to NYISO’s Zone J, buying shorter-term contracts in ComEd would have turned out to be more expensive, with farther-off prices being lower because of favorable forecasts for later years.

The lesson here is that different markets often require differing strategies, even when broad national trends point in only one direction.

What About Index Markets?

Index prices, on the other hand, have been highly unpredictable.

A year-by-year comparison of historical index prices for January in NYISO’s Zone J reveals that, over the last 7 years, the average index price (in $/MWh) for the month has come out to $76.56; compare that to January 2020 forward prices, which today sit at $68.86. Seems easy, right?

Actually, truncating the window and comparing prices from just the last 5 years (instead of 7) results in an average index cost of $55.36 — significantly lower than today’ forward price for January 2020. This is attributable to 2014, year of the polar vortex, when index prices in Zone J were as high as $175/MWh. It was an outlier winter, to be sure, but it skews the data so heavily that it complicates the question of whether historical prices are good predictors of future market behavior.

Watch Part 1 of the Summer Energy Outlook

Posted: May 23, 2019

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