In the power industry and managing risk, the rule was you were never allowed to take vacation in the summertime, but that old school way of thinking has faded away. We explain why and give an update of summer price movements below.
In the power industry and managing risk, the rule was you were never allowed to take vacation in the summertime, but that old school way of thinking has faded away. As we start to head to the dog days of August, we thought it would be a good time to give an update of summer price movements so far. In short order, summer price volatility has been within expected normal trading ranges for the peak demand season. We’ve seen some price action in all the power markets, but not enough to justify the higher valuations we saw on forward contracts heading into the peak season. As a result, the short term markets have been in a general bearish trend, with a few exceptions that are always the result of short term hot weather forecast related run-ups.
Let’s take a look at the prompt month August contracts in the eastern power markets. These contracts have traded down consistently through the rather uneventful month of June with no early heat in the weather forecasts. Early July heat prompted a brief run-up, but we’ve already almost fully recovered. As we head into this weekend’s heat wave, with hot weather alerts abound, the market continues to favor the downward trend. This seems counterintuitive—the prompt month easing off in front of a heat wave—but this pattern reflects the growing health of generation supply in eastern ISOs.
Despite all the rhetoric around retiring coal and nuclear facilities the past few years, eastern markets have found themselves flush with excess generation this summer due to large gains in natural gas generation development and renewable energy generation. Growing generation supply levels continue to square off (and lose) against stagnating and declining electricity demand nationwide as our electricity load grows smarter and more efficient.
Forward Prices have followed a similar trend in ERCOT, though the scale is far more drastic and the reasons a bit more nuanced so we want to explain ERCOT in more detail. ERCOT does not benefit from a healthy surplus of generation like eastern markets, and the region is in the midst of significant year-over-year demand growth. These two factors combine to yield tight reserve margins during periods of extremely high demand on the system. While this pumps large upward pressure into forward curves, we have seen ERCOT dispatchers demonstrate a strong ability to manage the grid so far this summer even with the extremely tight reserve margins. In other words, when the market has expected an elevated risk of extreme reserve pricing, we more often than not see a stable market with a combination of demand under-performing and wind over-performing against short term ERCOT forecasts.
The expectations are that any risk remaining on the table for the August contract in all the eastern and ERCOT power markets at this point rests in the hands of daily Real-Time and Day-Ahead market price volatility. Absent any significant and sustained price spikes over the entirety of a multi-day heat event, we’d expect the overall neutral to slightly bearish trend to continue on prompt summer pricing and not overreact to short term weather events.
In the past, the summer was not the time to take time off for your power portfolio managers, but with eastern excess generation and only short term heat events followed quickly with below normal temperatures, I can allow for a well-timed week off during the summer periods now.
Are you feeling good about your net open position for the rest of summer? Are you pushing off hedging winter load? It’s not too late to clean up ahead of the prompt month or too early to look towards the next peak season. Get in touch with our portfolio management team today for expert strategic position management and execution support. Email us at email@example.com or give us a call at 617-209-2420!