On behalf of the team at 5, I am pleased to forward our September market letter. If you had any doubts that the energy transition is happening, recent events in Texas and New York confirm that the answer is yes. As discussed below, these states have very different approaches to energy regulation, and both have struggled to incorporate intermittent resources in the energy mix. For clients in Texas, New York, or any other deregulated market, planning for the challenges of the energy transition, including increased regulatory risk, should be a key component of your energy management strategy.

Many are surprised to learn that there are several cost components that are added together to establish the rate in cents per kilowatt-hour in an electricity supply contract. Those components are summarized in Figure 1, which shows that the two largest are energy and capacity. It’s important to note that both energy and capacity are market-based, which means that the price of both is based on the forces of supply and demand. And while it may not be obvious, regulations and legislation can have a significant effect on the forces of supply and demand and thus the power markets. Between April 2018 and May 2019, the price of energy in New York City increased nearly 40% largely driven by a carbon tax proposed by the NYISO. Doubts around implementing that carbon tax caused prices to dramatically fall to just fourteen months later. This is an example of how regulatory forces can move market prices. Today, regulations in New York State are causing a dramatic increase in the price of capacity, the second largest cost component in a retail electricity supply price (See Figure 1). 

One of the most utilized pieces of fundamental analysis in the natural gas industry is the Energy Information Agency’s (EIA) Natural Gas Storage Report, which is released every Thursday morning at 10:30 ET.  This report summarizes the results of a weekly survey of most natural gas storage facilities across the US and shows how much natural gas the nation has in storage. It also gives a regional breakdown, along with a reference to normal storage levels for each week of the year as shown in Figure 1.  Many industry analysts use this data and the amount of natural gas in storage compared to what is normal (the 5-year average is commonly used) to understand and forecast natural gas prices.

Given that we are halfway through July, we thought it would be appropriate to provide an update on how major power markets have performed as they relate to each ISO’s coincident peak demand management program.

So far, both weather and demand on the PJM and NYISO grids have been mild compared to recent summers and average summer temperatures. The mean temperature, compared to the average over the last thirty, fourteen, and seven days for the period ending July 13, is shown in Figures 1, 2, and 3 below. These charts show that summer has not really arrived in the middle of the country and that temperatures in the Northeast are only 2º to 3º F above the average.

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