Further spot and forward declines in delivered Appalachian gas prices, at least outside of winter, are widening heat rates at PJM-West. We have been aggressive in our view on Q3 19 heat rates specifically, and with the market now in line with our view, we are further widening our forecast to account for the sub-$2 gas at Tetco M3 and nearby hubs. Forwards for shoulder months especially are in line with realised 2019 levels thus far.
Ongoing additions of new, more efficient gas plants, coupled with lack of underlying load growth, should lead to lower heat rates, assuming there are no other changes to the stack. However, deep outage seasons—PJM peak fall outages were 4-10 GW higher y/y the past two Octobers—and further coal plant retirements over the next year will maintain upward pressure on heat rates, assuming weather around the 10-year average.
Despite widening heat rates, lower gas prices are keeping the lid on forward spark spreads. Although they have recovered from their nadir in July, PJM-West sparks are still several dollars lower than in Q1 19. Despite this, and with the risk that expected capacity market revenues from mid-2022 onward are in flux as the market awaits FERC resolution on PJM reforms, developers continue to move forward with new plant construction. We examine one of the current newbuild phenomenon’s major drivers below—namely an influx of capital in eastern US markets from Asian generating and utility companies.
The eastern ISO markets overall are focussed on three things: winter gas restrictions and related power market pricing; evolution of carbon pricing, including near-term projects such as the Regional Greenhouse Gas Initiative (RGGI) and the potential implementation of the New York ISO program; and the related timing and impact of new rules on capacity market design. The gas restrictions will drive volatility into and throughout the winter as Tetco and related pipelines continue inspections and maintenance through November, if not longer (see E-mail alert: Weekly basis update: Re-emergence of Tetco M3–Transco Zone 6 NNY spread, 25 October 2019).
Only one state, rather than two, will join the RGGI roll call next year. New Jersey will rejoin, but Virginia will push at least another year. Pennsylvania potentially will also join, but not until 2022 at the soonest. However, New York’s pledge to implement a nearly $50/t carbon price in the state has drawn the most interest, with scrutiny on the spread between 2021, the earliest potential year it may start, and 2022 or 2023, the more likely potential start years. Our view remains that New York will start implementation no sooner than 2023, but the odds are not in favour of this.
Finally, on capacity, we will not have a FERC ruling on PJM’s long-awaited capacity market design until December’s Outlook, and the planning year 2022–23 auction will not take place until six to nine months after that, thereby delaying future auctions and potentially hampering future newbuild and retirement decisions. In the meantime, New England will revamp some of its underlying market rules to handle its grid’s evolution toward gas and renewable energy, and New York will focus on shorter-term updates to its spot capacity market, with trading on the current winter strip now underway.
And in ERCOT, where reliability is less of a concern for winter than for summer, 2019 was both the poster child for the thin reserve margins and a market solution which appeared to work.