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Tailwinds building for power? Natural gas rallies as reserves turn lower

Over the past two years, surplus capacity in most powermarket and in upstream coal and natural gas markets have served to keep priceslow and returns to generation light, particularly in merchant generationregions. While a generalized condition of surplus and low prices persists,there are broad signs that it is changing, with the summertime rally in naturalgas signaling an easing of fuel surpluses, and plant retirements in key regionsbringing reserve margins into greater focus. Taken together, these elements arepositive for wholesale power prices and the generation sector. Noteworthydevelopments from the second quarter release of the SNL Power Forecast includethe following:

* In PJM, the announced retirement of the Quad Citiesnuclear plant appears likely to support capacity payments in the COMED zone attheir current elevated levels.

* While the retirement of the James A. Fitzpatrick nuclearplant in NYISO would appear to support stronger upstate energy and capacitypricing, the loss in capacity is offset by continued lower demand growthexpectations in the region.

* MISO faces the prospect of tighter reserves in Zones 1-7as early as 2020, attributable in part to the announced retirement of theClinton Power Station in 2017.

* Similarly, the SPP region may need to add capacity by2020, with greater regional need indicated by the announced retirement of theFort Calhoun Nuclear Station by the end of 2016.

While new generation project activity has been light, itappears in most regions capable of filling in behind this spate of announcedretirements of nuclear plants. With natural gas prices low by historicalstandards, construction costs stable or falling, and financing costs stillfavorable, conditions remain conducive to replacing legacy generation.

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SNL Power Forecast subscribers can view the detailed report here.

SNL Energy is anoffering of S&P Global Market Intelligence.