The Midwest power markets were more subdued with the PJM/ComEd Day-ahead average for 2017 coming in at $26.95 per MWh, an 1.81% increase over the 2016 average of $26.47 per MWh. In an example of forward to spot convergence, the 2017 PJM/ComEd Calendar forward on December 28, 2016 traded at $30.94 per MWh, a 12.90% premium over the final spot price average observed. The 2017 MISO/Ameren Day-ahead average was $26.46 per MWh, an 1.58% increase over the 2016 average of $26.03 per MWh. Forward calendar prices experienced small declines in the PJM/ComEd region. The 2018 forward calendar price had the largest decline with a 7.94% loss to $26.66 per MWh, finishing right on top of the 2017 average day-ahead price of $26.95 per MWh referenced earlier. The 2019, 2020, and 2021 calendar prices declined 2.50%, 1.45%, and 1.57%, respectively, to $27.69, $27.83, and $27.51 per MWh. This leaves the PJM/ComEd forward curve quite flat after being noticeably backwardated when entering 2017. The 2018 MISO/Ameren forward curve closed at $28.00 per MWh, a 8.22% decline from the December 30, 2016 closing price of $30.51 per MWh, and the 2019 MISO/Ameren calendar price closed at $29.31 per MWh, a yearly decline of 2.14%.
In our opinion, the removal of the majority of backwardation in the forward curves for both natural gas and electricity was an important development in 2017. For natural gas, the Henry Hub and Chicago City Gate forward curves are implying prices that are significantly below what spot natural gas prices averaged in 2017. It is important to note that forward prices are just estimations of future spot prices. While spot prices certainly could average lower than the prices implied by the 2018-2021 forward curves, it is important to recognize that the forward prices are already trading at a 5-12% discount to recent spot pricing. Forward electricity pricing in the PJM/ComEd is at an approximately small 2-3% premium to last year’s PJM/ComEd spot price of $26.95 per MWh. Although the market still seems to be bearish, the flattening of the forward curves over the last year may indicate that we have reached a short-term equilibrium in supply and demand for both commodities.
