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Energy Market Update: March 5, 2020

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The existing correlation between electricity prices (particularly in the Eastern U.S.) and NYMEX natural gas markets appears to be growing stronger by the day, creating new patterns in the market. Direct Energy Business Strategist Tim Bigler tackles these trends in this week’s Energy Market Update.

Current NYMEX prices for natural gas are significantly below where they were one year ago. They are even lower, in fact, than the record-setting lows we saw in December 2019. The very same contracts that were selling for over $3/MMBtu this time last year are now closer to the $2.00 mark, with liquidity only decreasing after 2025 and contracts only reclaiming $3.00 as far out as 2028. 

Given that gas is unusually cheap at the moment, Energy Market Update followers might expect electricity prices to be dropping alongside it. This is true almost across the board, with ERCOT representing an exception due to ongoing reserve margin issues in Texas.

Elsewhere, however, buyers can breathe easy. In Northern California, a dramatic reshuffling of calendar strip prices has taken place. Whereas two years ago, in March 2018, calendar prices for 2019 through 2026 were spread from as low as $32/MWh to as high as $45, prices for those same calendar years (excluding those which have expired) are today clustered between $33 and $35. So not only have all contracts as far out as six years in the future condensed into a narrow price range, but the range into which they’ve fallen is close to a two-year low for electricity in this region. An almost identical scenario appears to be unfolding in Southern California. 

While low gas prices (along with increased presence of renewable energy) are creating a buyer’s market out west, it’s important to remember that an event like a drought or heat wave could reshuffle the markets yet again, and potentially not to buyers’ benefit.

Across the continent in New England, changes (albeit less dramatic ones) are also afoot. The same basic pattern we’re seeing in California is replicated here, although NEPOOL prices two years ago were already clustered and have remained, dropping from the $40/MWh range closer to $35, where they sit now. This is in part because gas prices tend to affect electricity in New England quite directly, but also because liquefied natural gas (LNG) capacity in the region is high.

In addition, states like Massachusetts are embracing solar energy, which may result in a so-called “duck curve”, in which abundant solar energy depresses demand during the day but runs out by the evening hours, when demand peaks. The growing popularity of solar and wind will no doubt continue to pose interesting problems for the industry, even as they cut down on the consumption of and need for fossil fuels.


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Posted: March 05, 2020