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Commodities 2022: Fundamentals may smooth out power markets' roller coaster


Most forward traders indicate tame second half

Milder weather, pandemic may lessen loads

Supply constraints may lessen ability to 'catch up'

  • Author
  • Justine Coyne    Mark Watson
  • Editor
  • James Bambino
  • Commodity
  • Coal Electric Power Energy Transition Natural Gas Metals Shipping
  • Tags
  • United States
  • Topic
  • Commodities 2022

While the roller coaster ride that US power markets have endured since the novel coronavirus pandemic took hold in March 2020 is not over, power forward traders may foresee a shortening of the hills and valleys by late 2022.

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However, supply chain issues for materials such as steel and coal may tighten power markets more than forward traders realize.

The 2022 on-peak forward curves for four US hubs as of Dec. 22 show price rangers substantially smaller compared to year-to-date monthly average day-ahead on-peak locational marginal prices in 2021. The exception is California where drought, wildfires, extreme weather and high renewable penetration present higher risk.

Also, in every case except California, forward highs are front-loaded to January and February, reflecting lingering concerns about the "black swan" event of February 2021's winter storm.

Pandemic, weather impacts

However, accelerating novel coronavirus infections may dampen economic activity in the first quarter. According to, which collects data from public health agencies, the seven-day moving average of new COVID-19 cases in the US rose to 171,573 as of Dec. 22, above the recent peak of 167,589 on Sept. 2. The last time the seven-day moving average topped Dec. 22's number was Jan. 26 at 172,377.

The Institute for Health Metrics and Evaluation in Seattle projects the daily infection rate in the US could top 2.7 million in late January, including those who never get tested, if protective mask use remains much below 80%. For comparison, IHME's previous highest daily infection rate was 504,275 on Dec. 28, 2020.

Another factor that may weaken power demand is weather. The National Weather Service's Dec. 16 forecast for January, February and March indicates the likelihood of near normal or above-normal temperatures for all except the Northern Rockies and the Pacific Northwest, where the probability for below-normal temperatures ranges from 33%-50%.

The US Energy Information Administration projects that heating-degree days in January, February and March will be down about 1.5% from 2021 levels. For the year, S&P Global Platts Analytics projects average load levels across the Lower 48 states in 2022 will be about 0.5% below 2021 levels.

Supply constraints

However, in a 2022 special report, Platts Analytics said, "After 2021 focused on energy demand recovery, 2022 will focus on whether supply can catch up."

An ability to "catch up" depends on supply and pricing constraints. Building power infrastructure requires steel, and prices for US flat-rolled steel products rose sharply in the first three quarters of 2021, with domestic hot-rolled coil, a steel pricing benchmark, surging 94% from the start of the year to a record high of $1,960/st in late September, according to Platts pricing data.

"If you are someone looking to expand the power grid, you're not going to get the transformers that you need," said John Anton, IHS Markit director of pricing and purchasing. "There will be a shortage of electrical steel next year and probably for many years to come and therefore there is going to be extreme pressure on the people who make electrical machinery from electrical steel."

"Lead times for transformers [I'm now] hearing from the largest companies in North America are out 12 months," Anton said.

Coal and natural gas

Another potential constraint is coal supplies, according to Platts Analytics.

"Global coal demand is expected to increase again in 2022 as developing markets, China and India in particular, will need additional energy supply from coal to meet incremental energy demand growth," Platts Analytics said.

In the US, the EIA projects that the power sector's coal inventories fell by about 51 million short tons, about 38%, in 2021 and will further decline by 10 million st, or 13%, in 2022, despite a 9% increase in domestic coal production in 2021 and another 6% increase projected for 2022.

Transportation is a factor in electric generation coal costs, and the US EIA projects power plant coal costs to average almost $36/st in 2022, up 3.2% from $34.75/st in 2021, which was up 2.8% from 2020's $33.85/st.

However, natural gas will likely mitigate coal's influence on power pricing. As of Dec. 22, the Henry Hub forward strip for the 12 months of 2022 had a discount of almost 2% from Henry Hub average monthly spot prices in 2021, Platts price data shows.