At the end of last week, we gave you an idea of the impact of recent price volatility on forward prices in our article titled “Volatility Returns to Energy Markets: How will it impact you?” We promised to let you know how index energy markets, or day-ahead markets, had responded to the cold weather and increased market volatility.
What is going on in index energy markets? Like the forward markets, index markets are more volatile now than they have been in 3 years. What does this volatility mean for you?
Why should you care about index energy markets?
Those customers with some exposure to index rates will care the most about the volatility evident in the early weeks of 2018. All customers in New York State who take energy supply from their utility have exposure to index rates. Supplier rates in New York State are based on day ahead index rates.
Any customer who signed a 100% fixed price contract with a supplier will not have index exposure. For those of you on fixed contracts, now is the time when your fixed price contract pays off. This is the time when the premiums that you pay for having suppliers take price risk really pays off.
Customers with a blend of fixed and index rates are not completely insulated from index price volatility, nor are they entirely exposed. The impact of rates on your costs will depend on the percentage of your costs that are fixed.
What is happening in index markets now?
Let’s compare two pictures of energy index markets. You can visualize the impact of energy volatility.
The first graph is available in the NYISO’s Monthly Report from December 2017. The following graph shows the Daily NYISO Average Cost/MWh (Energy & Ancillary Services) excluding capacity for 2016 and 2017. We have shown this graph at points in the past to help visualize volatility (or lack of volatility) in index energy markets.
The 2016 average LBMP* appears in blue while the 2017 day ahead energy index prices (LBMP) are shaded in purple. With the exception of the last week in December 2017, average index prices for both years remained very low, averaging in the mid-$30/MWh for the year.
Let’s compare last year to January 2018 month-to-date
Now let’s look at what has happened during the first 2 weeks of January, 2018. The following line graph shows the zonal (A through K) average day ahead LBMP for January 1 through January 16. Each Zone corresponds to a location in the state. (That’s the location in locational based marginal pricing “LBMP”.) To determine what Zone your facility is located in, take a look at this map. In brief, Zone A is in Western NY, Zone F is in the Capital region, Zones H & I are in Westchester, Zone J is NYC, Zone K is Long Island.
The state-wide average day ahead index price in New York State for energy through the 16th of January was over $100/MWh (or the equivalent of $0.10/kWh). The first two weeks of the month averaged more than 3 times the annual average for the last two years.
Key lessons from the start to 2018
- Energy markets have the potential to be volatile. Don’t get lulled in to believing that there is no risk in energy markets.
- Just because we’ve seen a return to volatility during cold weather events doesn’t mean that prices have gone up to stay. There are plenty of resources and no shortage of capacity.
- Sustained low day ahead prices of $35/MWh for 2 years is probably more remarkable than $100/MWh for 2 weeks.
- The relative increase (from historic lows, to higher day ahead prices) is what is likely to cause a shock. Ideally, customers have managed expectations, and risk, so that these few weeks do not have a terrible impact on budgets.
Bottom line for finance and energy professionals: For those with no exposure to index prices, now is the time to explain the value of your strategy.
Customers with index exposure, do not panic. These are a few short weeks. Overall, you’ve benefited from low volatility in day-ahead/index markets. Decide if you want to change course based on how the rest of the Winter plays out. Then, implement your new strategy well in advance of the Winter months.
Call us if you’d like to review your strategy.
*The NYISO defines LBMP as “A methodology where the price of Energy at each location in the NYS Transmission System/NYCA is equivalent to the cost to supply the next increment of Load at that location.” For additional definitions and resources, see the MWh’s Resources page.