The price of natural gas has been falling steadily over the last year with the Henry Hub 12-month rolling futures strip declining 34.75% since March 31, 2014. The Central Appalachian nearby coal futures contract price has declined 18.35% over the same period while the 12-month PJM/Comed rolling forward electricity contract has lost 15.58% of its value. Recently however, the price of natural gas has continued to decline while the 12-month PJM/ComEd price has halted its decline and even moved up a bit. During the 1st quarter the 12-month Chicago citygate natural gas 12-month forward declined 4.84% while the 12-month PJM/Comed forward electricity price advanced 4.43%. Some of this price movement can be explained by the interplay of natural gas and coal in setting the spot price of electricity in the PJM/ComEd region.
During the PJM/ComEd peak hours over the last few years, natural gas generation has usually been the generation on margin, setting the spot electricity price during the peak hours. During the last 5 or 6 weeks, this relationship has changed and now more often than not, coal-fired generation is on the margin. With the price to produce electricity using natural gas now below the cost to produce power using coal-fired generation, coal may have a larger impact on pricing until natural gas becomes the majority marginal fuel. This relationship between coal and gas-fired generation is dependent on many factors including outages, generation attributes and the overall system load.
Another contributor to forward prices is what we term the probability for scarcity pricing. Spot electricity is volatile because supply needs to meet demand so large increases/ decreases in either supply or demand can cause significant price jumps. We examined all of the PJM/ComEd Day-Ahead prices from January 2006 to determine the 25 highest priced days (scarcity pricing). We found it quite interesting that 14 of those days have occurred in the last 15 months. With the PJM/ ComEd forward strips reasonably priced from a historical perspective, it may be a good time to eliminate the risk of scarcity pricing with fixed price electricity contracts.
