Setting Sun

Last week we mentioned warm weather coupled with setting sun wasn't great for LMP prices in the final hours of the evening. We aren't going to rehash the conversation, but looking below in the Day Ahead Prices table, we can see that what was predicted for earlier this week did play out. The elevated On Peak prices are almost all because of the late afternoon and early evening hours where load stays elevated as solar comes off line requiring more expensive units to be called upon.

Capacity Market 101

Ok, fair disclosure, "Capacity Market 101" is something between a misnomer and an oxymoron....maybe along the lines of "the complexity of airline cuisine". "101" is usually some sort of slang which comes from the code for introductory courses, like Algebra 101. Actually not like Algebra 101, that was hard, maybe bowling 101. Anyway, there is nothing simple or introductory about the capacity markets these days and please allow us to go on a rambling journey.

Most readers have a general idea of what the capacity market is in the world of electricity and power markets, but for those that are new, a quick attempt of an easy explanation is warranted. Electricity is the one commodity that can't be stored....we assume Elon Musk isn't a reader, but if he is, we know we know Mr. Musk....let's go with not enough electricity can be stored at utility scale. Because electrons have to, for the most part Elon, be produced and consumed at the same time, there needs to be a stable of generators willing to meet demand and start producing at a moments notice or else demand over takes supply to the point where the lights need to be shut off. To rectify this, a market was set up (in some ISOs, but not all) where generators would offer a price where they are willing to take a payment per day per MW to be available to come online and produce electricity to meet demand as requested whenever needed. This money has to come from somewhere which of course is the user of electricity. Not to get too in the weeds, but basically the price is determined based on how much a user (load) is drawing during the system's peak, A helpful analogy might be surge pricing in the HOV lane on your local freeway and the rate for all hours being set on the most busy time so if you were driving home at rush hour, that's your new charge even at midnight.

So why are we discussing capacity? For years in ISOs like PJM and MISO, capacity has had muted prices as supply was ample and load growth was flat. Last week PJM's Market Monitor came out with a report that included some staggering numbers on capacity pricing and they blamed data centers. The headline number was $16.1 Billion from $7.3 Billion or 82% in auction results year over year. Because of an earlier agreement, PJM capped the auction at $329 per MW/d meaning if you had the ability to generate 10 MW, that would be $3290 a day times 365 for a nice revenue line just to be on the system. While capacity prices have been volatile, they tended to peak much lower over the past decade reaching the mid $150s a few times. Over the past few years, PJM has seen system capacity jump from $29 in 24/25 to $270 this year and the capped $329 for next. PJM's Market Monitor estimates that had the cap not been in place, prices could have reached $388 MW/d. As an aside, this cap was reached through negotiations with the state of PA as they have tried to slow the rise. This was the last year of the agreed cap and unless something changes, next year will be wide open.

Electric bills tend to be made of three things; the cost of kW, demand charges, and transmission or delivery. Those aren't exactly the technical terms, but it makes it easier to understand. Depending on the utility, coop, or municipality, those three charges can be weighted differently as some entities might have ample generation to offset the cost increase while some may not. If you don't have enough generation to serve customers, electricity and capacity need to be purchased and passed along to consumers.

We warned this was not easy, and if you read the PJM Market Monitor report, you might agree. We also warned this was going to be a ramble and it appears we held our promise. In summary, or an attempt to wrap this up, historically when a discussion around rising electric prices happened, it was input fuel driving the cost of kW higher. Recently, the cost of capacity is the concern making headlines and it's not always presented or broken down as such. What concerns us a little, is there appears to be a bit of just making this up as we go. PJM has delayed their capacity market auctions and then put a cap on them. MISO just had to admit a $280 million dollar error on their capacity tariff because of a modeling error. If that weren't enough, we learned this week in the world where we trade EVERYTHING, including capacity, some market participants aren't making markets anymore. Nothing fuels volatility more than lack of liquidity coupled with uncertainty. Some interesting days lie ahead, keep an eye on the headlines.

Aussie LNG/GOLD

What would a week of WPO be without at least a passing mention of LNG. Readers know that one of our talking points on long term natural gas prices here in the USA, is the rise of LNG exports as making natural less localized and more fungible to world markets like oil. This week's mention isn't some big prognostication on US gas prices, but something we found interesting.

A few years ago the US became the top exporter in the world of LNG with Australia and Qatar often vying for second place depending on the year. Australia is rich in commodities, especially iron ore, LNG, and met coal....and apparently gold bullion. The chart below shows the value of gold exports will soon surpass LNG in the near future. Obviously, this move is because of the impressive rally in gold, but it is worth pondering the slow decline in LNG. Perhaps the same fungible action the domestic US market is facing could be showing up in Australia, although with inverse pricing? That's a story for another WPO day. For now, just take the Aussie nugget (pun intended) and use it at your weekend cocktail party when market story swapping starts. There's a pretty good chance everyone is Nvidia-ed out, and gold will be the new topic du jour.