Santa has arrived a few days early for electricity buyers in PJM because falling natural gas prices have had a parallel effect on electricity prices for calendar year 2021. Usually, natural gas is withdrawn from storage during the month of November as the weather cools and heating demand increases. However, there was a net increase in the amount of gas placed into storage due to the mild temperatures throughout the northeast over the last several weeks. This caused natural gas prices to fall significantly and as reported last month, this is a big deal. This gas market correction has put downward pressure on near-term electricity prices across PJM and created excellent purchasing opportunities.
Figure 1 shows how wholesale electricity prices in PSEG for calendar year 2021 (blue line) and 2022 (black line) have traded over the last 15 months. Note that electricity prices in both calendar years steadily increased in the months following the onset of the pandemic, reaching a peak at the beginning of November. As natural gas prices started to fall in early November, electricity prices began to decline in both calendar years as well. Since most of this market movement has been driven by the relatively mild temperatures, the most dramatic movements have been in calendar year 2021. Figure 1 shows that since November 1st, electricity prices dropped by 12% and 6% respectively for calendar years 2021 and 2022.
Figure 1: Calendar Year Wholesale Electricity PJM PSEG from 5
Figure 2 shows the 4-year forward wholesale trading range for electricity in PSEG. The height of the green bar shows the 72-month range of low and high prices for the calendar years on the x-axis. The black bar shows where prices are trading as of 12/17/20. This chart clearly shows that the recent price decrease has placed wholesale electricity prices near the bottom of the 6-year trading range. Additionally, the black lines show that forward prices are relatively flat out to calendar year 2024. This means that there is little premium built into these futures prices.
Figure 1: Calendar Year Electricity Trading Range PJM PSEG from 5
While the price movements shown in Figures 1 and 2 are specific to the PSEG trading hub, similar market movements are seen throughout PJM. Given that that these recent market corrections are largely driven by mild temperatures and low natural gas futures, it is possible that colder weather in late December and early January could quickly send these markets in the other direction. If hope is not a good strategy, hoping for more mild temperatures is an equally dubious plan. Clients with electricity contracts that are expiring in 2021 should capitalize on this opportunity while it is available (and be sure to leave some cookies out for Santa as well).
