ERCOT 

There are two words that describe the reaction of most commercial clients shopping for electricity in Texas: Sticker Shock. Figure 1 shows how the wholesale price of electricity for calendar years 2025 through 2028 has traded over the last four years. In ERCOT, electricity markets were at all-time lows of approximately $20/MWh in the months immediately before the pandemic. Over the last 48 months, power prices in ERCOT have more than doubled as wholesale prices are now more than $50/MWh for calendar years 2025 through 2028. The steady rise of electricity prices in ERCOT is largely driven by concerns that there is not enough supply to meet growing demand across the state. This demand is coming from power-hungry data centers used to support the rapid growth in AI, technology, and cryptocurrency mining in addition to manufacturing and population growth throughout the state. While substantial amounts of electricity from new solar and wind-generating assets have come online, those intermittent resources cannot be counted on to operate on demand. These are some of the dominant factors that have pushed up wholesale electricity prices in ERCOT.  

By most accounts, the winter of 2022/2023 was relatively mild. Only 2.3 inches of snow fell in New York City all winter, which is the lowest snowfall total in the 150 years that the National Oceanic and Atmospheric Administration (NOAA) has been tracking this data. Additionally, the price of natural gas fell 25% from the beginning of December through February on moderate temperatures and lower demand for natural gas used for heating throughout the winter. Despite the mild weather, one winter storm nearly brought PJM’s electricity grid to its knees. Winter Storm Elliott, which occurred between December 22 and December 26 last year, drastically affected power markets across the 13 states that make up the PJM Interconnection. The aftermath of Winter Storm Elliott has added a tremendous amount of uncertainty to PJM’s capacity markets and any new fixed-price retail electricity contracts that go beyond May 2025.    

Winter Storm Elliott may not have been an anomaly. This storm was the fifth event in the last eleven years where cold weather-related generation outages jeopardized the reliability of the electricity grid. In February 2021, ERCOT’s electric grid came within four minutes of a complete blackout across Texas from Winter Storm Uri. And while there were no rolling blackouts during Winter Storm Elliott, many describe last year’s storm as a “close call” with disaster. As reported in 5’s February Market Letter, more than 23% of PJM’s entire generation fleet was offline during last year’s storm. Figure 1 shows the extent of the outages in PJM during Winter Storm Elliott. 

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.

Here is the good news: in February, PJM posted the results of its latest capacity auction for the planning year June 2024 to May 2025. And for the most part, those prices are similar or lower than those for the 2023/2024 planning year. Historically, PJM holds annual capacity auctions to secure capacity three years in advance. However, recent auctions have been delayed over the last few years due to FERC rulings on the validity of the PJM’s auction design. These auctions are important because the results determine future capacity rates paid to generators, which are a major component of overall electricity rates for all retail customers in PJM states. Without this clarity and price transparency, electricity customers in PJM states risk paying high premiums to fix the price of capacity in future electricity contracts. The results of the latest auction provide price certainty for contracts through May 2025. The good news is that overall, the price of capacity fell again in most parts of PJM.

Figure 1 shows the latest auction clearing prices in dollars per MW per day across different Locational Delivery Areas (LDAs) in PJM. The capacity price for most of PJM cleared at $28.92/MW day (see the light blue area in Figure 1 labeled “RTO”), which is down from $34.13/MW day from last year’s auction for planning year 2023/2024. Capacity in eastern parts of PJM cleared at higher rates because of regional differences in the generation mix (natural gas, nuclear, coal) and the electricity infrastructure across various states and utilities. For example, capacity prices are higher in the BGE and Eastern MAAC LDAs because there is congestion on the electricity grid when power is moved from Ohio to Maryland and New Jersey during periods of peak power demand.

Over the past few years, energy markets have been pushed to the brink, and we’ve seen unprecedented market volatility brought on by the pandemic, supply and demand issues, extreme weather conditions, and more. We recently reported that natural gas prices have significantly fallen over the last several months. And while electricity rates typically follow natural gas prices, customers in Ohio who are on default service with the utility may be surprised to see their rates materially increase in June.

The utility companies in Ohio determine their standard offer service rates by conducting a set of auctions, which establish rates for a planning year from June through May. These auctions are carried out between November and April to procure the supply of electricity. The November auctions have played a significant role in the anticipated surge in prices due to elevated wholesale electricity prices witnessed in the fall of 2022, shown in Figure 1. The current price to compare to supplier rates in Columbus (AEP’s Ohio Power) is 7.4¢/kWh and is only valid for two more months. November’s auction for this utility cleared at 11.9¢/kWh for 45% of their expected load. An additional incremental auction held this month cleared at 8.9¢/kWh for the remaining 55%, softening some of the price increase. Rates for the planning year 2023/2034 are now fixed at a weighted average price of 10.3¢/kWh for energy. After additional cost components are factored in, the forecasted price to compare in AEP starting in June is 12¢/kWh, a 55% increase from current commercial rates. Commercial customers in FirstEnergy utilities (Ohio Edison, Toledo Edison, and The Illuminating Company), Duke, and AES territories can expect similar rate increases in the range of 10 to 13¢/kWh beginning in June 2023.