Hurricane season officially began this month and in a report at the end of May, NOAA predicted between 17 and 25 named storms for the period between June 1 and November 30. According to NOAA, “The upcoming Atlantic hurricane season is expected to have above-normal activity due to a confluence of factors, including near-record warm ocean temperatures in the Atlantic Ocean, development of La Nina conditions in the Pacific, reduced Atlantic trade winds and less wind shear, all of which tend to favor tropical storm formation.” It is only three weeks into hurricane season and Tropical Storm Alberto has already pounded Mexico and parts of Texas with torrential rain and flooding. Many clients ask how hurricane and tropical storm activity affect energy prices. In the past, significant hurricane activity in the Gulf of Mexico had a major impact on natural gas prices. In the 1990’s, hurricane tracking was one of the most important fundamentals energy traders watched. The destructive capabilities of a powerful hurricane in the Gulf of Mexico heading towards the large production regions (Corpus Christi TX to Mobile AL) would cause drilling and production platforms in the Gulf to evacuate their personnel, typically requiring the well to be closed. This would result in a dramatic reduction in the amount of natural gas produced for a week or more if there was substantial damage to the platforms. As shown in Figure 1, the highest natural gas prices in the last thirty years occurred in the wake of Hurricanes Rita and Katrina in 2005. Both storms caused major disruptions to the production and flow of natural gas.   

New York, like many states across the country, has a standard by which certain qualifying renewable generation assets are awarded one Renewable Energy Certificate (REC) for each MWh of electricity delivered to the grid. RECs provide two main functions to the market:

One of the most common questions clients ask when purchasing electricity or natural gas is, “How much money am I going to save?” This is a reasonable question and for many years, savings could be realized because energy prices had been trending lower. Figure 1 shows how the NYMEX has settled over the last 31 years. This chart shows that natural gas hit its peak in 2006 in the wake of Hurricane Katrina and Rita where gas prices approached $14/Dth. 

On behalf of the team at 5, I am pleased to forward our May 2024 market letter.  In this edition, we discuss several interrelated topics.  First, we look at ongoing legal challenges to two new federal energy regulations, (i) the SEC’s climate change reporting rules, and (ii) the EPA’s new power plant emission standards. Second, we address a question we are hearing often from our clients, especially those faced with rising energy prices: “Could President Trump’s election reduce the price of electricity?”  

2024 will be a busy year for the Federal Energy Regulatory Commission (FERC). FERC is typically run by five commissioners, appointed by the President of the United States and confirmed by the Senate.¹ With Commissioner Glick stepping down at the end of 2022 and Commissioner Danly stepping down at the end of 2023, FERC is down to three commissioners, Democrat Willie Phillips (appointed Chairman by President Biden in February 2024), Republican Mark Christie, and Democrat Allison Clements. Commissioner Clements’ term expires on June 30, but she is expected to remain at FERC until the end of the year. With the election in full swing, we do not expect President Biden to seek confirmation for additional Commissioners (FERC rules mandate that no more than three members are from one political party).

In late January, the Biden Administration paused all LNG export facility applications, so that the Department of Energy (DOE) can assess whether any additional LNG export capacity is in the public interest. There seems to be a little confusion in the general public as to what exactly this pause does to short-term and long-term LNG export capacity and therefore natural gas supply and price. We thought it would be helpful to illustrate what this suspension means in terms of actual natural gas supply and demand.

We will skip the politics of the decision for now and jump straight to the facts of the matter.

First, this suspension only impacts pending applications requesting to export to countries without a Free Trade Agreement in place with the US ¹. That’s the first carve out. Second, there is already 14.28 Bcf/day of export capacity in operation in North America (not affected by this order), and another 12 Bcf/day under construction (also not affected by this order). Finally, there is also another 22 Bcf/day of approved capacity not yet under construction (also not impacted by this order), most of which is still working toward a Final Investment Decision (FID), meaning the developers of the sites are still trying to gather enough long-term contracts to move forward with the construction phase of the project.

All in all, by the end of 2026, North America will have a total daily output capacity of almost 25 billion cubic as shown in Figure 1. To put that into perspective, the total global LNG demand in 2023 was about 400 million tons, which is the equivalent of about 53 Bcf/day. The entire market demand is currently 53 Bcf/day, the US, Canada, and Mexico have 14 Bcf of active export capacity online and another 34 Bcf of capacity under construction, or approved (bringing the total to 48 Bcf). Given that the US is not the only game in town (Russia and Qatar also have another 27 Bcf/day in development), it seems as though our future LNG export capacity might exceed global demand, even with forecasted demand growth ².

On January 30, 2024, the Texas Supreme Court heard oral arguments in a ground-breaking case related to Winter Storm Uri. At the heart of the case is the question of whether the Texas PUC had the authority to manually set the ERCOT rates paid by electricity suppliers to $9,000 per MWh during the four days of Winter Storm Uri. Attorneys representing the PUC (supported by attorneys representing numerous energy companies, including NRG, Calpine, and Talen Energy) stated that this action was necessary to avoid a weeks-long blackout for much of the state.  In response, attorneys for numerous energy companies suffering losses as a result (including Luminant and Pattern Energy) argue that the PUC acted outside of the authority granted by the Texas legislature in taking such action.  The Texas Third Circuit Court of Appeals in Austin previously ruled against the PUC in March, and the PUC appealed to the Texas Supreme Court.