Is Now a Good Time to Lock in My Next Energy Contract?

Is Now a Good Time to Lock in My Next Energy Contract?

Figure 1. Natural Gas and PJM Power Trends. Note the diverging trend lines signaling a correlation shift

More surprising, the two-month trend is up, in contrast to natural gas. Many regional energy buyers are standing on the sidelines, waiting to buy in hope that power prices will decline. Is this the right approach?

Here’s my advice:

  • If you are a budget buyer and the current price meets your goals, consider locking in.
  • If you have a risk management plan, don’t deviate from it.
  • If you are not a budget buyer, consider your goals and establish a plan.
  • Don’t try to time the market; make data-driven, rational decisions.

To be clear, I’m recommending any budget buyers waiting for power prices to catch up with natural gas declines reconsider their approach. If the current market enables you to meet your energy budget, don’t wait for better prices. They may not happen.

Why Energy Prices Might Stay Higher

On April 16, the Mercury and Air Toxic Standards (MATS) rule mandating new environmental standards for coal-fired power plants took effect. As a result, many coal-fired generators have assessed their plant economics and decided to retire them rather than invest in costly emissions control upgrades. In PJM, this accounts for a loss of 10,000 MW of generating capacity in 2015 alone.

This exiting generation has been an important contributor towards meeting the daily supply needs in the market. Without it, more expensive, gas fired generation will be more frequently called on, especially during times of higher demand. Cheaper generation replaced by more expensive generation results in higher prices for energy buyers.

Energy Price Correlations Will Stay Strong in the Long Run

We’re seeing a breakdown between gas and power price relationships in PJM as the market reacts to the recent MATS rule. Looking at the present correlation between power and natural gas prices (see "Present", Figure 2), it appears we could be transitioning to a new relationship between the two. But I believe we’ll see the correlation return once the market adjusts.

 

Figure 2. Shifting Natural Gas and Power Correlations. Illustrative, not to scale

Notice how in Figure 2 the left side of the chart shows a strong visual correlation between natural gas and power prices, which breaks down in the middle of the chart. The correlation returns towards the right, though the lines are now farther apart. I believe that in the future, the price difference between power and natural gas in the Mid Atlantic will be greater than it was in the past.

Bottom Line: Don’t Chase the Market

Despite the unusual volatility in today’s pricing environment, my advice to buyers remains as it has been for the past 18 years of electricity deregulation: don’t let market events alter an established energy purchasing plan.

A budget-driven energy buyer should consider locking in whenever its goals can be met.

And if you’re looking for a way to defend your decision to transact with pricing trends as they are, note that we’re in the lowest 2% pricing range we’ve been in over the past six years for natural gas. That, coupled with the MATS-induced shift to higher cost generating units, might be reason enough for budget-driven buyers to lock in.

Note: Your approach to procurement should be unique to your facility. For instance, for accounts in PJM with especially large loads, a sub-account approach may make sense. We welcome you to talk to one of our procurement experts directly for specific guidance for your account.

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