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Power Forecast Analysis: As Generation Shortages Develop, Can Green Energy Fill The Gap?

Highlights

Cold weather and low inventories drove natural gas price volatility during the winter, compressing outright spark spreads.

Generation investment signals grow across several regions

Outright spark spreads declined year-over-year for the fourth quarter, as surging natural gas outpaced growth in power prices. Implied spark spreads in forward markets benched higher, indicating a profitable investment environment for new generation across several markets. Tighter reserves are driving prices in the key merchant markets of PJM and ERCOT, while fuel supply concerns are emerging in New England and Southern California. Coal retirements appear likely to cause generation gaps in the Midwest and Desert Southwest as well.

ISO New England (ISONE) Mass Hub forward sparks grew by 21% to over $17 per MWh, while NYISO Zone G expanded by 5% to $13 per MWh. PJM markets benefited most from natural gas prices, with spark spreads at Western Hub growing by 7% to over $23 per MWh. Higher scarcity payments drove forward spark spreads above $29 per MWh. Western forward markets also topped $20 per MWh.

Natural gas prices jump on winter weather

Cold weather and low inventories drove natural gas price volatility during the winter, compressing outright spark spreads. By contrast, the '17-18 winter featured mild weather and steady prices, which allowed spark spreads to appreciate closer to key investment support levels of $20 per MWh.

Developing reserve shortages

ISONE is the only market with forecast net capacity additions by 2022, with the U.S. as a whole forecast to lose 12-24 GW of generation. Additions of planned generation over the last three quarters consist almost exclusively of renewable energy plants. With ERCOT, MISO, and the Desert Southwest needing capacity this year and next, can renewable energy keep wholesale prices in check?

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