Near-term spark spreads decline on mild weather
Mild spring weather compared to 2018 drove electricity demand substantially lower across major markets, which had knock-on effects as well for natural gas demand and prices. This combination of factors pushed spot prices for electricity down across virtually all markets during the second quarter. Where in 2018 summer got off to an early start with warmer weather, the second quarter of 2019 featured cloudy and rainy weather across much of the U.S., which persisted through June.
This was reflected in much reduced cooling demand, but also an early end to heating demand that kept natural gas supplies high. While the second quarter is almost always a period of low natural gas demand, this year's softness drove spot prices for natural gas down by 15% by the quarter's close. Lower electricity demand outpaced the decline in natural gas prices, resulting in lower spark spreads across the board.
In contrast to the spring of 2018, spark spreads fell below investment benchmarks across all markets. ERCOT-Houston Zone declined the least, down 4% to $14.50 per MWh. PJM Western Hub and MISO Indiana Hub sparks each collapsed 44% to just over $12 per MWh. Across Western U.S. markets, spark spreads closed in the low single digits.
Natural gas price pullback provides little support
Natural gas supply expanded rapidly April-June, shrinking storage deficits and driving spot prices well below $3 per MMBtu heading in to summer. While this normally supports sparks spreads, the support was more than offset by lower electricity demand.
New capacity emerging to offset reserve shortages
New gas-fired generation has moved forward in Ohio and Michigan, which may address tight conditions in those markets. Of the eight regions covered by the Market Intelligence Power Forecast, four are now projected to experience net declines in capacity through 2023, MISO is projected to break even and Market Intelligence projects that three regions will need to add generation to maintain reserve margins.
In some regions, Market Intelligence forecasts an immediate need for capacity to meet regional reserve targets, including SRSG, ERCOT, MISO and PJM. These forecast "modeled" capacity additions total 19.9 GW across eight regions. Additionally, Market Intelligence projects that current renewable portfolio standards and related incentives will drive development of 24.6 GW (installed) of renewable capacity into the market, which may also address supply shortfalls.
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