Why didn’t the tomato cross the border? It couldn’t ketchup with the tariff hike. Okay, maybe it’s a bit early for tariff humor. But in all seriousness, the recent tariff announcements have only added complexity to the economic outlook, making it almost impossible to forecast future market prices. Tariffs generally lead to higher costs and, on a broader scale, can signal the potential for a recession – typically a bearish indicator of energy prices. That said, the fundamentals of supply and demand in the power markets are bullish and should apply upward pressure on energy prices. 

Before each winter, many organizations responsible for overseeing North America's power grids release risk assessments. These reports primarily focus on reliability and resiliency, with less emphasis on wholesale prices. Although wholesale prices can indicate risk, forward prices do not always fully capture the potential risk of energy scarcity. Conversely, forward price volatility may sometimes reflect risks that are less likely than the prices suggest. This article summarizes some of these risk assessments and highlights the risks currently indicated by forward market prices for January and February 2025.

To start, the North American Electric Reliability Corporation (NERC) releases a Winter Reliability Assessment (WRA) each fall, covering key markets and regions across North America, including PJM, New York, New England, and Texas. This year’s report largely aligns with expectations, indicating that most deregulated regions face reliability risks during periods of "above-normal" load conditions. This risk summary is shown below in Figure 1.

Figure 1. Winter Reliability Risk Area Summary, by NERC

According to NERC, the primary risk facing most regions this winter is the availability of natural gas. While the power industry has made significant strides since 2021 to enhance power plant performance, much of this progress has focused on improvements in planning and forecasting. However, the most significant challenge remains the capacity of natural gas pipelines and maintaining adequate pipeline pressure levels during periods of extreme cold, which continue to pose the greatest threat to reliable power production during the winter months.

Many of the largest data center owners (e.g. Google, Microsoft, and Amazon) are exploring the co-location of data center load adjacent to new or existing power plants. Energy regulators now struggle to come up with rules that fairly address the co-location of energy-intensive data centers.

Did you get the Simpson’s Nuclear Power Plant play set with the Homer Simpson action figure for Christmas? No? You must not have been good this year, because it seems like nuclear power is all anyone can talk about in the energy industry lately.  This is because many claim that a nuclear power “renaissance” is happening in the United States. Recently, it was reported that companies such as Amazon, Meta, Microsoft, and Google are “betting big” on nuclear power to support their growing needs for electricity for their data centers. Other appealing claims around nuclear power are that it is good for the environment because greenhouse gas emissions are negligible and unlike wind and solar assets, these plants, for the most part, run 24/7. Additionally, unlike solar and wind farms, nuclear power plants use a fraction of the land necessary to produce the same amount of electricity.  

On December 9, PJM proposed a series of changes to its capacity rules. These changes are designed to address: (i) the high clearing prices in the 2025/2026 auction, and (ii) the increasing risk of capacity shortfalls. As discussed in earlier 5 by 5s, this capacity shortfall is driven by numerous factors including the construction of new data centers that require significant amounts of electricity, the retirement of older fossil fuel units, and delays in the development of new generation and transmission lines.

The election was a resounding win for President-Elect Trump and provides him with a clear mandate to change federal energy policy. His ability to implement policies is further supported by the fact that the Republican party now controls the Senate and may control the House of Representatives. In light of this historic shift, we have provided a short summary of the likely energy policy changes to be implemented by the Trump Administration and their impact on energy prices. While our position has been that the outcome of the election will not significantly affect near-term prices, there are factors that may influence prices in the long term.