Electricity Futures Decrease in PJM

Electricity futures in PJM have decreased over the course of the summer and are favorable for making longer term purchases.  Figure 1 shows electricity futures prices at the PJM West trading hub (Southwestern PA) out to August 2024.  The blue line is the price curve on April 8, 2019 and the black line is the price curve on August 12, 2019.  In the Northeast, winter electricity prices are the primary determinant for electricity prices. Since the beginning of the summer, the peak winter price in January has fallen by 10% out to 2024 as illustrated with the green arrows. Note that the peak summer price in July of each year has also decreased materially over the last three months.    

Figure 1: PJM West Forward Curve, by 5

A more macroscopic view of electricity futures in PJM is shown in Figure 2.  This chart shows the 48-month forward wholesale trading range for electricity at the PJM West trading hub. The height of the green bar shows the 4-year range of low and high prices for electricity traded in calendar years 2020-2024. The black bar shows where rates were trading as of August 13, 2019.  This chart shows that electricity prices in calendar years 2021 - 2024 are all near the bottom of the four-year trading range with a slight discount in prices from 2020 to 2023.  This phenomenon (of prices decreasing with time) is known as backwardation. Note that this pattern of market backwardation can also be seen in Figure 1 as the peak winter prices decrease with time from January 2020 to January 2023.

Figure 2: Historical Trading Range, by 5

While Figures 1 and 2 are specific to the market at the PJM West trading hub, similar trends are observed in other parts of PJM.  The decrease in winter electricity futures over the last three months coupled with the backwardation of the market out to 2023 provide strong purchasing signals.  Clients with open positions over the next several winters should consider making purchases and capitalizing on these recent drops in winter wholesale electricity prices.