Weekly Energy Market Updates by Region - Archive

Issue week: September 11th, 2020  (Wk 37)

POWER MARKETS

WEST Demand spiked over the weekend amid record-breaking temperatures across California and the Desert Southwest. In response, CAISO issued Flex Alerts from Saturday through Monday to implore consumers to conserve during the nightly ramp to avoid rolling blackouts. Although CAISO had to declare Stage 2 Emergencies, which indicate that expected energy requirements can no longer be met, on both Saturday and Sunday amid the demand spikes and forced outages due to the wild-fires, its demand response programs and calls for demand reduction did manage to stave off rolling blackouts. Actual peak demand was approximately 3,000 MW lower than expected.

ERCOT  As a late-summer cold front makes conditions wetter across the state, peak loads have retreated into the low 50,000 MW range from the low 60,000 MW range last week. As a result, real-time prices have averaged under $20/MWh over the past week. Forward prices for the prompt six months have dropped by approximately $0.50/MMBtu from last week because of a $0.07/MMBtu selloff in the winter natural gas strip. Meanwhile, prices down the remainder of the curve are essentially flat.

EAST Demand has officially cooled off from the Midwest to the Northeast, so much so that Calpine Energy Solutions does not expect to send any more CORE alerts this season. With that, prices have remained stable this week. The main hubs are printing near $20/MWh. In particular, Real Time prices in ISO-NE are averaging $25/MWh, about $8/MWh above last week.

NUCLEAR POWER FACING THE NUCLEAR OPTION

When Treasury spreads turned negative last summer, financial mar-kets sounded the alarm that recession was imminent. Some ques-tioned the validity of those fears at the time, but those concerns ulti-mately proved right, although the timing was off. That anxiety was rooted in a pattern, dating back to the 1960s, where negative Treasury spreads consistently preceded recessions, as de-picted in the chart below. A year ago, no other economic data points indicated recession, but, in fairness, such negative spreads have his-torically preceded downturns by an average of 8-12 months—provided that they lasted for a long enough period of time. Thus, the question was whether last summer’s spreads had been negative long enough to serve as a credible warning. Of course, “long enough” is clear only in hindsight, but it turns out that they had been. However, the current recession was finally triggered not by typical economics but by the COVID-19 lockdowns. Because this recession, which officially started in February 2020, is technically still ongoing (despite many economic metrics showing signs of improvement), the big questions now are when it will end and whether Treasury spreads can offer a clue. Typically, after going nega-tive, spreads turn positive at the beginning of a recession and grow increasingly positive, on average, for several months before the end. At the end of each of the last two recessions in 2001 and 2009, spreads ranged from 2.5% to 3.0%. On the other hand, they were only around 1.5% at the end of recessions prior to 2001, mainly because short-term interest rates back then were well above zero, unlike what they have been in the last dozen years. Holding near a paltry 0.5%, current spreads are a long way from either of those trends. Unfortunately, this suggests that the light at the end of the tunnel could still be several months away, so the remainder of this unforgettable year of infamy is likely to stay rough. In any event, Treasury spreads appear to be a key indicator in determining whether next year is more mundane, as everyone hopes. Once they widen out enough, brighter days should be ahead for the U.S. economy.