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Bulls Arriving for 2020 and No News Isn't Good News for Capacity

September 19, 2019

Markets - PJM

Over the last month, electricity futures in PJM have increased across all calendar years out to 2025.  The most dramatic movement has been in the wholesale price of electricity for calendar year 2020.  Figure 1 shows wholesale power prices in PJM East going back to the beginning of 2019.  This chart shows that the price for calendar year 2020 (the dark blue line) has consistently been higher than calendar years 2021 through 2023. 

Wholesale prices hit a low during the first week of July and began to rally in the middle of August.  Since August 15th, the price for a 12-month strip of electricity has increased from $28.29 to $30.64 per MWh, an increase of 8% over the last four weeks.   And while the wholesale prices of calendar years 2021 through 2023 have also increased, those increases have been less than 1%.  For the most part, these electricity price increases have followed the natural gas market.  This month’s NYMEX article identifies some of the fundamentals that have created near-term bullish market trends in natural gas.  These same fundamentals appear to be influencing wholesale electricity prices in PJM too.   

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Figure 1: Calendar Year Wholesale Prices PJM East, by 5

In other news, there is still no date that has been set for the next PJM capacity auction.  Capacity is one of the major cost components of a retail electricity price, and in PJM, those capacity prices have been established through an auction process.  The annual capacity auction typically takes place in May and sets the price for a twelve-month period beginning in June three years in the future.  This year’s auction was to set initial capacity prices for June 2022 through May 2023.  However, the Federal Energy Regulatory Commission (FERC) and PJM have been at odds over the legitimacy of this auction process, specifically how to account for and reward the growing size of individual state subsidized renewable generation programs.  The capacity auction was originally postponed until August, but that auction never happened as the disagreement between FERC and PJM has not been resolved.  The failure of FERC and PJM to come to an agreement on a fair process to set the price of capacity means that there is some uncertainty about capacity prices for retail electricity contracts beyond May 2022.   Clients that are interested in capitalizing on lower electricity futures should consider a retail contract that passes through capacity for months beyond May of 2022.

Topics: Markets PJM

Written by 5

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