Wholesale Energy Market Update
Types of Products
The 3 main basic product strategies are:
- Fixed product strategies, these are a based off weighted averages of future electricity prices to give one constant price.
- Index product strategies, these are weighted averages of differing hourly costs of energy during each hour of a contract term.
- Hybrid product strategies, like the name implies, are some combination of both Fixed and Index pricing.
Another way to look at this is:
Fixed prices are based on future estimates, while index prices are based on actual costs.
One important thing to note is the way price risk can be portrayed in this industry. Locking in for 100% of usage at a fixed rate ahead of time can guarantee a price you will pay. However, the rate could be much higher than the rate you would have paid on an all index product. The takeaway is that no product is risk free, they each come with their own set of risks, and finding a hybrid strategy that fits could best mitigate a portion of each of these different risks.
All the products strategies of Fixed, Index, and Hybrid have components other than the actual energy commodity that are part of the final rate an energy consumer must pay.
To get a better understanding, let’s discuss the main components of electricity contract rates of ISO-NE & PJM. To note we are not talking about Transmission & Distribution that will still be billed by utilities.
The main components are:
The commodity or actual electricity you use consume.
It’s like a form of electricity Insurance. An example would be that in Massachusetts, as car drivers are required to have insurance to drive on public roads, electricity users need to cover the cost of capacity to consume energy off the electric grid. This topic is much more complicated and too long to explain here. Therefore, it is just being mentioned, and If you would like to learn more please reach out to us.
This can be referenced by several names and acronyms such as RPS/ Renewable Portfolio Standards and RECs / Renewable Energy Credits: It is the financial function to promote the growth of green energy in different areas.
For our purposes, this includes everything else.
Let’s concentrate on just one component for now, the actual energy commodity.
Wholesale Energy Markets
When electricity consumers evaluate their options for purchasing electricity, they look at product strategy type, and they look at term length.
Regarding contract term length, they have a start date for service, and they usually like to evaluate several term length rates. It is common to look at the standard contract terms of 12, 24, 36, and 48 months among others.
A basic explanation; Suppliers develop prices for the electric commodity portion by looking at a consumer’s usage pattern, otherwise known as load profile, and applying that profile the monthly cost values for each month included in the desired contract term.
The graph below shows the Around the Clock values for both ISO-NE and PJM for the rest of 2019 and 2020.
ATC Average Wholesale Prices
As you can easily see from the pronounced peaks on the line graph, and by looking at the yellow highlighted numbers in the table, the winter months are the most expensive, and summer is the next most expensive, in both ISO-New England and PJM.
For example, as seen, the month of just January 2020 was valued at 6.81 cents this week, while at the same time around half of the months of the 2020 year were valued at below 3 cents.
The winter is the most expensive due to the high cost of natural gas.
A common misconception that can cost businesses money is comparing a short-term utility rate, that doesn’t include more expensive winter months, against longer-term supplier contracts. In a lot of cases supplier contracts can be lower than the average of multiple high and low utility rates.
Now that we have a better understanding that each month of a calendar year has a different cost for electricity at a point in time, let’s look at how the average of all 12 months of a year have changed in value over the past 52 weeks.
Let’s look at how the ISO-New England Internal Mass Hub, which is used to price New England states, has performed over the past 52 weeks. The graph below is based on the average cost for the entire Calendar year 2020.
ISO-NE Internal Hub ATC Wholesale 2020 ($/kWh)
The values are per Kilowatt hour, before any line losses or load profiles calculations are applied.
The values on the Y axis on the left side of the line graph show the price of electricity, and the values on the bottom X axis are the dates ranging from last July 2018 thru June 17, 2019.
The blue line that moves up and down is the price of the Calendar year 2020 over that time period. The flat lines represent: green is the high, red the average, and low the orange.
The yellow star all the way to the right represents where the market was as of July 17, 2019.
As we can see on the line graph prices are at a lower point than they have been over the past 52 weeks.
- The high was : 4.44 cents
- The average is: 4.416 cents
- And as of July 17, 2019 was at: 3.9 cents
- As it clear to see, the current price is below the average and close to the lows, so it might make good financial sense for a client to lock in at least a portion of their electric load.
PJM (which stands for Pennsylvania, Jersey, Maryland, although it includes more states now) is currently experiencing a similar market situation as ISO-New England.
The graph below is based on the average cost for the entire Calendar year 2020.
PJM Western Hub ATC DA Wholesale 2020 ($/kWh)
This line graph is set up the same as the previous one, where the blue line that moves up and down is the price of the Calendar year 2020 over the time period. And the flat lines represent: green the high, red the average, and low the orange
- The high was: 3.36 cents
- The average is: 3.15 cents
- And as of July 17, 2019 was at: 2.84 cents
Just like in ISO-NE, the PJM price is below the average and close to a 52 week low, so it might make good financial sense for a client to lock in at least a portion of their electric load.
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