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Energy Market Update: January 22, 2021

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2021 has arrived, which means that buyers -- both large and small -- are already looking to 2022 for opportunities to save on electricity and natural gas.
 
Direct Energy Business Strategist Tim Bigler unpacks nationwide trends in this week’s Energy Market Update.
 

 

 

Current Electricity Prices

On the electricity front, it’s worth noting that prices today across many ISOs are even with or lower than 2019 prices. For some regions -- specifically NYISO Zone J, NEPOOL, and others -- prices have dropped significantly from 18 months ago. The past 18 months, independent of COVID-19, have seen a handful of small factors that have kept prices low. These include: lower natural gas prices; increased pipeline capacity; expansion of renewable energy projects; growing institutional emphasis on energy efficiency; and more. In addition, some observers believe that energy use (and by extension, energy markets) will enter a new paradigm as the country emerges from the COVID-19 pandemic, though this remains to be seen.

Califorinia

For buyers in California, there’s more to the story. Although prices are indeed lower than they were 18 to 24 months ago, 2020 and the COVID-19 pandemic did not play out in buyers’ favor. Record-breaking demand for electricity drove prices higher, and aggressive demand response measures were the only reason they didn’t spike even more. Today, there is significant potential for drought in the region, as snowpack levels appear to be much lower than expected. Meanwhile, natural gas imports from the Rocky Mountain region have declined, and other gas producers are shifting their focus away from domestic electricity generation to export opportunities like LNG and cross-border pipelines to Mexico. These factors together may portend high electricity prices in CAISO in the coming months, or at least a prolonged period of relatively elevated prices before a respite.

Mid-Atlantic and Southern Regions

In the Mid-Atlantic and Southern regions, prices are consistently even with or lower than any we’ve seen in the last two years. In part, this is because reserve margins in ERCOT and PJM are reportedly increasing, surpassing analyst expectations and withdrawing a certain risk premium from the market. When reserve margins are high, there is potential for markets to stabilize; for buyers and these low prices could act as a support going forward, perhaps increasing the appeal of fixed or managed energy products.

Northeast Region

Meanwhile, in the Northeast, it’s necessary to consider other unique factors that affect price. Carbon pricing, which has been a regulatory talking point in NYISO since 2019, has come back into focus and may become a reality in 2021. In addition, the Indian Point nuclear facility north of New York City is set to take its final unit offline in April of 2021. These unique circumstances have resulted in a contango pattern within NYISO Zone J, meaning that electricity prices are lower now, and get more expensive with each consecutive year into the future.

However, it’s important to note that in the very same region, fixed natural gas prices are not in contango — just the opposite. Transco Zone 6 (which feeds into NYISO Zone J) gas prices are in backwardation, meaning that prices go lower as contracts move further out into the future: ‘22 index being the most expensive; followed by ‘23, which is cheaper; followed by ‘24; and so on. Obviously, this means that gas and electricity prices are disconnected somewhat, the insight is that this decoupling may be thanks to the potential effect of carbon pricing. Subsequently, the steady price levels we’re seeing now may serve as price supports for the year to come as the COVID-19 pandemic stabilizes and regulators re-shift their focus to sustainability.

Carbon Pricing 

Along the same lines, on-peak energy prices in PJM have begun to follow a contango pattern too, while natural gas prices in the region remain in backwardation. Why? Carbon pricing is being discussed for PJM, and although talks have not progressed as quickly as they have in NYISO, the market is responding by placing a premium on more distant futures as the likelihood of a carbon pricing initiative increases. Given the uncertainty surrounding this initiative and the corresponding early indicators in the market, a managed energy product could help buyers make informed decisions and protect themselves from potential cost increases over the coming year.

 


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Posted: January 22, 2021

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