Pipes not wires

Published at 16:06 27 Sep 2019 by

The pace of renewables growth in Texas, along with continued gains in demand driven by petroleum activity, will offset each other to leave reserve margins next summer similar to where they stood entering August 2019, though it would take warmer-than-normal weather to surpass prices seen in summer 2019 or even to justify current August 2020 forwards.

PJM market forwards have rebounded sufficiently from their midsummer lows and are now largely in line with our forecast. Winter basis gains and faster retirements for coal plants in Illinois and Pennsylvania supported the recent rally. The lack of quorum needed to make key decisions at FERC will delay the capacity market reforms for PJM until early 2020, bumping into the timeline for planning-year 2023-24 auction next spring, though it has yet to dent enthusiasm among new plant developers as more than 5GW of CCGTs are currently under construction.

New England has felt an early winter chill from the operator of the Tetco and Algonquin pipeline systems, pushing forward winter basis up and delivered gas to the highest for any LNG market globally. This should be more than sufficient to keep an even gassier generating stack running this winter on all but the coldest peak days as we see winter power prices as overvalued.

Power prices in New York have largely followed gas basis higher as well, though we expect prices could move up slightly from here. Next summer, however, is closer to fair value, when the market is perpetuating a slight premium for local gas basis, owing to the increased call on gas following the shutdown next spring of the first of two units at the Indian Point nuclear plant.

Now that we are mostly past the cooling season, our concerns about overall manufacturing activity in the US and its impact on demand, persist. We have relatively light industrial gas demand growth in our forecast, and the slowdown continues in auto sales, exacerbated by GM workers striking over the past month. We also expect oil production growth to slow in 2020 from 2019 levels, though Permian output should still increase by nearly 0.6 mb/d, bolstering West Texas energy usage.

Longer-term, four US states and the District of Columbia have enacted 100% clean-energy targets in 2019, including Virginia which set goals of 30% renewables by 2030 and 100% carbon-free power by 2050 through an executive order issued by Gov Ralph Northam on 17 September. The latter echoes legislation signed this summer in New York and earlier this year targets set in New Mexico and Washington state. Six other states either have such goals already or are expected to adopt them through state targets or through their largest electric utilities. These 10 states represent nearly a quarter of US electricity demand. Another eight states are part of the Regional Greenhouse Gas Initiative, representing a further 7% of power usage in the US.

The targets will continue to lead to reduced coal generation capacity and slow new gas-fired generation development as well, while bolstering efforts to develop offshore wind—with 10 GW likely to move forward along the east coast over the next decade—and onshore wind, solar and battery storage.

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