Electricity was less volatile than natural gas but prices were lower across the complex. Average Daily PJM/ComEd day-ahead prices were $28.11 per Mwh, a 31.9% decline from the 2014 average price of $41.28 per Mwh and the lowest yearly day-ahead average price since ComEd joined the PJM pool in 2006. Forward prices were much less volatile as the 12-month rolling forward price ended the year down 4.66% at $29.03 per Mwh, the 24-month rolling forward price fell 5.24% to $29.47 per mwh and the 36-month rolling forward price declined 7.16% to $29.30 per Mwh. For comparison purposes, the 2-year price declines for the PJM/ComEd 12, 24 and 36-month rolling forward curves have been 6.96%, 3.29%, and 2.82% respectively.
The relative price outperformance of electricity versus natural gas may provide a clue to where prices may go in 2016. Most customers need to procure both natural gas and electricity and there is a correlation between the two commodities, though the strength of the correlation can vary over time. The above numbers indicate the correlation has been reasonably weak for forward prices during the natural gas bear market. Most of this has to do with the production costs of the two commodities. While fracturing technology has significantly lowered the costs and increased the output of natural gas production, electricity has higher fixed generation costs in addition to fuel and the daily bidding strategies of generators reflect that. The current PJM/ComEd forward curves are trading at such levels that there is not much premium above the estimated total production costs so in the short-term, the downside for electricity is somewhat limited for the ComEd area (other areas of country need to be analyzed independently). As stated above, natural gas production costs have collapsed but we feel that the current market structure and prices reflects that. We also believe that natural gas demand is going to exceed expectations and that prices over the next two years will have an upward bias higher and that customers should take advantage of the two year price decline and lock in a fixed price for natural gas.
Analyst – David Mousseau
Sources – CME Group, Reuters
