This Outlook publication is the first for our new North America power service, which will typically be released mid-month. We welcome your feedback on the new report.
A complete lack of price volatility in spring 2019—due in part to milder-than-normal weather through early June—has crushed forward power prices throughout PJM. While we expect some heat-rate expansion at PJM Western Hub from later this year into 2020, the market is resetting as a significant surplus of new CCGTs has created a reserve-margin overhang. Most of the plants have been installed in the Marcellus and adjacent Utica shale basins. Any hopes that pending changes to energy, reserve or capacity markets would deliver constructive outcomes have also not materialised, though federal regulators could provide answers in time for 2020 activity.
Power markets in the northeast US are choking on an unprecedented wave of new gas-fired capacity that is exacerbating the impact of discounted non-heating season gas basis from PJM through to the ISOs of New York and New England and compressing realised and forward prices. With real summer weather only now appearing, we believe forward heat rates are now undervalued, but the window of opportunity may be short considering New York’s longer-term effort to combat carbon and renewable and import contracts moving forward in several New England states.
Power usage in PJM and the Northeast has recovered slightly from its nadir in April, also partly down to weather along with continued gains in distributed solar generation and energy efficiency schemes. Lower industrial demand due to shutdowns of auto-related manufacturing in Q1 19 has also contributed to soggy power usage readings. The return of cooling load in June has stabilised demand a bit, though we expect modest y/y declines through 2021 at least.
Any remaining summer premium in Texas will wholly depend on normal cooling load appearing. Even with the higher capacity reported by the ERCOT seasonal assessment (SARA) in May, and the amelioration of drought conditions since the start of the year, there is still potential for a summer real-time spike if late July or August temperatures head into and stay in the triple digits at the same time that wind generation, which now exceeds 22 GW of capacity, does not perform.
Demand in ERCOT is set to continue to expand at a healthy pace, especially as oil prices have rebounded and related activity drives industrial usage and overall economic growth. Data for this spring was less than robust, primarily due to difficult weather comparisons y/y. We take a slightly more conservative view on load growth than the ISO. The Dallas Fed manufacturing index increased in May, though the report was mixed overall, and the six-month ahead production index dropped m/m by 11 points to 25.2 (see Fig 19).
Fuel prices will not provide support for power prices in the coming months, even as the new gas-fired capacity has increased the linkage of gas to power, especially in PJM (see Natural Gas: North America Outlook: What Upside?, June 2019). Our Henry Hub price outlook for the rest of the injection season is $2.25/mmbtu due to limited demand growth, with a forecast end-October storage carryout of 3.72 tcf. That leads to an end-March 2020 carryout near 1.6 tcf, which should pressure winter prices to $2.52/mmbtu. Our view on basis is also generally weaker than current forwards, especially in West Texas and at M3 in the Mid-Atlantic, with the latter a major price-setter for gas units in PJM.