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Polar vortex conditions could form, potentially driving up US power, gas prices

Highlights

Prolonged cold needed to significantly increase prices

Arctic air could hit in late January: AccuWeather

New York — US weather forecasters said there are indications that cold air outbreaks could begin during the third week of January while polar vortex conditions could develop, bringing Arctic air into the Midwest and Northeast, which could increase power and natural gas prices.

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"Just prior to the end of December and ongoing now through Jan. 6, 2021, there has been a surge in temperatures in the stratosphere above the Arctic Circle," Paul Pastelok, AccuWeather's lead long-range meteorologist, said in an AccuWeather report.

The temperature surge could lead to a weakening of the polar vortex around 10 to14 days later, Pastelok said. "When this storm near the North Pole that tends to keep Arctic air locked up weakens, it allows frigid air to escape and push southward toward the mid-latitudes," according to the report posted to the AccuWeather website.

Market impacts

If polar vortex conditions were to push Arctic air south into the US, extreme cold temperatures could put upward pressure on Northeast gas and power prices, analysts said.

"The potential for the presence of polar vortex conditions certainly poses upside risk to Northeast gas and power prices for the balance of January and February, although futures reflect some market skepticism," Kieran Kemmerer, power market analyst with S&P Global Platts Analytics, said in a Jan. 7 email.

"Significant impacts from cold weather will stem from prolonged cold, the absence of which is unlikely to drive anything other than a brief increase in daily basis," Kemmerer said.

"Given the availability of oil-fired generation (and on-site fuel supplies) in the Northeast, a brief spike in basis is unlikely to pose substantial upside to power prices (as seen in December). However, the presence of sustained cold will call into question LNG economics and market mechanisms such as ISO-New England's opportunity cost offer calculation, which has gone largely untested since its inception," he added.

New York Independent System Operator Zone J New York City futures prices for February were approaching $44/MWh on Jan. 7.

Transco Zone 6 New York forward gas prices also showed a slight uptick heading toward February, according to Platts M2MS Forward Curve data.

"After the first surge of Arctic air, there are likely to be additional waves of cold air that spread from the Central states to the Eastern states during the latter part of January and into early February," AccuWeather's Pastelok said.

After a prolonged early January 2018 cold spell in the US Northeast, NYISO Zone J New York City on-peak prices spiked to $358.95/MWh and NYISO Zone K Long Island neared $343/MWh. The January 2018 average real-time NYISO Zone J price was $102.07/MWh, a level that has not been approached since then.

The NYISO's record winter peak power demand of 25,738 MW occurred on January 7, 2014 during a polar vortex event. The NYISO has forecasted that peak demand for winter 2020-21 will reach 24,130 MW.

"The upcoming major pattern change for much of the Central and Eastern states could lead to a dramatic increase in heating costs during the second half of the month that could spill over into February," AccuWeather said in its report.