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ISO-NE’s Capacity Auction Cleared Below Expectations

Front month natural gas closed yesterday at $2.812/MMBtu, up 3.49% from last week’s closing price of $2.717/MMBtu. Storage levels decreased by 166 bcf, which was slightly lower than the expected withdrawal of 168 bcf. The natural gas withdrawal for the same week last year was 85 bcf and the five-year average is 104 bcf. The total 1,539 bcf in storage is 9.1% below last year’s level for the same week and 21.6% below the five-year average. Prices increased 23 cents from $2.69/MMBtu last Wednesday to $2.92/MMBtu this past Wednesday at the Transco Zone 6 trading point for NYC (EIA). “The NYMEX 12-month strip has plummeted from previous highs due to a shrinking storage deficit brought on by milder temperatures, while near-record production has kept pressure on deferred calendar strip prices” (Constellation).

Constellation’s Energy Market Intelligence Webinar stated that ISO-NE’s 13th capacity auction cleared well-below expectations. All of the zones cleared at $3.80/kW-month while market consensus heading into the auction was between $4.00 and $4.75/kW-month. The $3.80/kW-month clearing price was 83 cents, 17.93%, lower than last year’s clearing price. “This auction caught most by surprise by clearing significantly lower than expected, but customers can still amortize higher front-term costs with lower back-end pricing” (Constellation).

Natural gas pricing plays a key role in electricity power pricing due to the increasing reliance on natural gas fired generators as nuclear, coal, and oil generation is retired and mothballed. As the marginal unit of generation, gas prices are directly correlated to power pricing (more so in some regions such as NYC vs. others such as parts of PJM). We keep an eye on natural gas market fundamentals in order to provide insights into forward power pricing for our clients. Gas production is expected to continue to grow, however, there is speculation that demand growth will outpace supply primarily due to LNG and Mexican exports and increased power burn, presenting upside risk to power pricing in the future.

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