Electricity Market Update
October 3, 2016
Electricity markets trade in ways that are unique across different regions. Below we highlight activity in zones around the U.S. and provide some generic recommendations based on current market conditions. We can provide custom risk exposure models or market analytics for your specific situation. Contact your Hospital Energy representative or fill out our contact form. We also provide a Natural Gas Market Update, which may be of interest.
New England (ISO-NE Mass Hub)
Prices remain at attractive levels, experiencing a very narrow trading range for the month of September. The curve remains flat, so we would recommend a long-term 25% to 50% hedge through 2021, though an aggressive risk taker could take a smaller portion of the winters, especially winters in '19 and later, to try to capture more savings. These winter contracts, currently around $65, have ranged between $55 and $80 in the last 12 months.
New York State (NYISO)
- Metro-Area (Zones G, J): In one of the most volatile markets this summer, Zn J prices have remained relatively stable over the last month, with calendar strips settling around $40. Overall, each zone’s curve is slightly contango. The seasonality closely mirrors MassHub, with winters trading about $15 above contract lows and non-winters being the more attractive parts of the strip. We recommend hedging 25% through 2019.
- Upstate (Zone A): Upstate zones (sometimes referred to as Rest Of State, or ROS) prices rose approximately $2/MWh in the last two weeks of September, before backing off slightly at the beginning of October. A $2/MWh move is large given that the strip trading range over the last 12 months is only $5/MWh. The curve is slightly backwardated through 2020, meaning longer term deals are trading at a small discount. Winter pricing looks a little overpriced. However, due to the tight trading band and the bounce from recent low prices, there’s not a ton of upside to be realized with a seasonal strategy. A 25% hedge through 2020 is recommended.
Mid-Atlantic (PJM West Hub)
For the last two months or so, PJM West has experienced one of the best energy buying opportunities in the country. Calendar 2017 prices have drifted up slightly, but pricing through 2021 are very attractive. We'd recommend a 50% to 75% hedge through 2020 or 2021. Now is the cheapest 2019 has ever traded.
Midwest (PJM N. IL Hub)
The curve is backwardated through 2021, which means the best opportunity is to look long term. A 25% to 50% hedge through 2021 is recommended for this zone to capture some of the savings offered in future years. October has seen Calendar 2017 reverse an upward trend that had started back in August.
Midwest (MISO IN Hub)
The curve is flat through 2020. The 2017 strip remains high due to its summer run-up, but its rise hasn't pulled the back half of the curve upward. The trading range for this zone is not large, with contracts trading in a $5/MWh band over the last 12 months. A 25% hedge for 2018 and 2019 is appropriate.
Our recommendation would be a 50% hedge through 2020. The 2017 calendar strip was trading abnormally low earlier in the year and has now flipped the script by trading above 2018 and 2019. Later years are very attractive and now represents a good time to add a layer or extend a contract through 2020.
Prices have steadily declined since mid-July (about $3/MWh for 2018 and 2019 calendar strips). While our last update was a bit more cautious, pricing is more attractive now, especially in 2018 and 2019. We feel comfortable recommending a 25% to 50% hedge through 2019 or 2020.
Pacific Northwest (Mid-Columbia)
Overall, this zone has traded in a pretty tight $5/MWh range over the last 12 months. We are setting some contract lows in the spring months of 2018 and 2019, but some contract highs in summer of 2017. Calendar 2017 traded lower earlier this year, but has risen while later years stayed relatively stable. Compare the 2017 strip price to the 2018 strip price; they are nearly the same, but it represents one of the best times to buy 2018 (better than 81% of market closes), while only a mediocre time to buy 2017 (better than 46% of market closes). Our recommendation is to hedge 25 through 2019 or mid-2020.
* Throughout this update, we make hedge recommendations as if to a generic energy purchaser. We define a "generic client" as one who is interested in a layered hedge product and has a target of hedging 75% to 100% of their load. We assume they are currently unhedged for the terms we mention.
* The terms "Contango" and "Backwardation" are often confused in the industry. We use "Backwardation" to describe a situation where the future prices are cheaper than the current price; so you essentially buy at a discount. We use "Contango" to describe a situation where future prices are higher than the current price; so you essentially buy at a premium.
* All prices in the tables above are wholesale prices, for flat calendar strips, traded at pricing hubs. Prices seen by energy consumers will include shaping and congestion charges (the difference between energy delivered at your facility and at the hub). These prices are reported in $/MWh, which is the units most often used in the industry. Electric consumers may be more familiar seeing units in kWh. A price of $50/MWh is the same as $0.05/kWh, or 5 cents/kWh. When we report “Better Than MKT Closes,” it represents the percent of the time the price shown was better than the previous 12 months of trades. A value of 90% indicates that 90 percent of the time, the market closed higher than the current price.