Since the start of 2014, the PJM/Comed forward curves for 2015, 2016, and 2017 have increased 18.32%, 26.68% and 27.55% respectively. These price moves along with the attendant capacity price increases we have highlighted previously in these pages have left customers with expiring contracts in a bit of a quandary when facing higher prices going forward.
While it is impossible to correctly predict exactly where prices are heading, we can look at the breakdown of these forward curves against historical Day-Ahead prices to gauge an understanding of what parts of the curve may be undervalued or overvalued on a historical basis. A review of the above chart shows the three-year forward curve starting in July against what the historical Day-Ahead prices have averaged for each of the months over the last 8 years. Comed joined the PJM interconnection in 2004 but has only been operating under the current Locational Marginal Pricing (LMP) system since 2006. What this chart shows is that the winter and summer months of the forward curve have expected prices much higher than the averages and that the shoulder months have expected prices lower than what the eight year averages have been.
Intuitively, the higher seasonal prices makes sense because the high Day-Ahead prices seen in January, February and to some extent March showed that the market was capable of having VERY HIGH spot prices in high usage periods (seen during the winter and the summer) and a forward curve at its core is just an expectation of future spot prices. The lower prices for the shoulder months do not make quite as much sense because the forward curves are implying prices that are below the eight-year averages and the fuel (coal, natural gas etc.) forward prices that create cost curves for electricity generation are significantly higher.
There is some mean reversion that exists in the energy market and the point of this article is to highlight possible mispricing. This not to say that the seasonal months will not continue to go higher and shoulder months lower, it is just to make the reader aware that over the last few months the market has been pricing in these expected scenarios.