ESAI Power’s summer forecast for power prices in PJM is bullish. Both Day-Ahead and Spot markets should see increased volatility due to stronger loads, robust gas prices, and generation retirements.
In this blog, we’ll provide a preview into the ESAI Power Energy Watch bullish forecasts and expected generation changes that will impact energy prices in PJM, NYISO and ISO-New England.
The upside potential for delivered natural gas and power prices across the Northeast will keep the ISO markets interesting in the upcoming months. Weather forecasts in PJM, ISO-New England, and NYISO continue to call for warm weather and elevated load levels that ultimately contribute to ESAI’s bullish price forecasts. PJM specifically will see robust gas and on-peak power prices heightened by the region’s impactful coal retirements.
Now, let’s dive into a few key reasons for our bullish summer outlook, focusing on PJM.
BULLISH MARKET DRIVERS
PJM is expecting to see 1-3 degrees above normal temperatures this summer. Warmer weather and the need for air-conditioning will boost demand for electricity in the residential sector, ultimately securing the residential sector as the biggest portion of the PJM load profile. Despite the efforts of the federal government and states to lift COVID-19 restrictions and increase the percentage of vaccinated individuals, a significant number of employees are expected to work from home this summer and contribute to residential load. Higher summer loads tend to support both natural gas and power prices.
Despite COVID-19-related disruptions, natural gas supply and demand remains balanced. Currently, gas inventories remain relatively in line, if not slightly above, the 5-year average. U.S. dry gas production is stable, averaging 91.4 Bcf/d this past April. And as of early May, inventories stand at 2.029 Tcf, 70 Bcf above the 5-year average.
Increased production out of the Marcellus/Utica Shale and limited pipeline capacity has resulted in significant gas basis discounts at Northeast delivery points outside the winter months.
However, higher gas demand this summer, with overall electricity demand increasing during hot weather, as well as gas-fired generation being slightly less efficient in warm weather, should moderate pipeline constraints and provide some upside potential to ESAI Power’s regional natural gas price outlook.
Higher load expectations also contribute to ESAI’s elevated summer forecast for PJM power prices. A 10% increase in load is expected to boost power prices at the PJM Western Hub by 5-9 percent during the summer months. Recent power forwards are trading below ESAI summer outlook and appear to discount the upside potential to both delivered natural gas prices and power prices.
Another part of the bullish forecast equation is generation retirements. With generation slated to retire, PJM power prices will likely be supported this summer. Two coal units are scheduled to retire in PJM by June 1. Chalk Point, Maryland’s largest coal-fired power plant, is retiring 730 MW of capacity due to unfavorable economics and increased costs associated with environmental regulations. While this retirement directly impacts summer power prices at the PJM Western Hub, it also reflects the larger generation shift towards renewables that is underway across all the Northeast markets.
RGGI, the Regional Greenhouse Gas Initiative, also plays a role in the generation shift. ESAI expects CO2 emissions to continue its downwards trend based on state clean energy goals and fossil-fuel plant retirements. Chalk Point’s environmental and economic reasoning for retiring coal-fired capacity is becoming an increasingly popular phenomenon in electricity markets. Programs like RGGI put a price on carbon emissions and can contribute to the retirement of coal-fired generation. As of May 9th, over-the-counter RGGI allowance prices were trading at $7.94/ton, a 5-percent decrease from the $8.35/ton print in early April. These prices are slightly higher than ESAI’s 2021 forecast.
Overall, ESAI Power’s summer forecast for power prices in PJM is bullish.
Both Day-Ahead and Spot markets should see increased volatility due to:
- Stronger loads
- Robust gas prices
- Generation retirements
As we shift out of the shoulder season in the next few weeks, generator and transmission outages will become less important and the focus will lean towards load levels and fuel mix changes. Look for PJM’s BRA Results and MOPR Reform analysis in our next publication of Energy Watch at the end of June. For more information and specific price data, check out ESAI’s Free Trial Service here: ESAI Power Free Trial