PJM Transition Auctions Increase Cost of Electricity

Electricity supply company (ESCOs) fixed rates increased approximately 3/10s of a cent over the last 2 weeks starting in June 2016 although natural gas prices remaining relatively stable during this period. Natural gas has recently become the largest energy source for the generation of electricity; therefore natural gas and electricity rates are highly correlated.

Why did rates increase?

FERC mandated the PJM hold 2 transition auctions to insure there is sufficient Capacity to provide electricity during high demand periods, but the additional Capacity does not come without a cost.

The 2 transition auctions were held on August 26-27 & Sept 3-4.

The following charts are from PJM’s website, and reflect the increases for 2016/2017 and 2017/2018. The Capacity increases below account for the increased ESCO fixed rates over the last 2 weeks. The old rate is in the column on the left, in green, and the new rates are in the yellow column, on the right.

The above auction results not only increased ESCO fixed rates, they will also increase Utility’s tariff rates starting in June 2016.

Therefore, with natural gas near a 3 year low we recommend consumers reserve fixed rates from an ESCO for the following 2 reasons:

1. Natural gas prices have been higher than now 95% of the time over the last 13 years, therefore, it is highly probable this energy source for the generation of electricity will be higher in June 2016.

2. Based on the mandated FERC PJM transition auctions Capacity costs will absolutely be higher starting in June 2016.

For the 2 above reasons we recommend consumers reserve fixed rates at this time from ESCOs for protection through May 2018.

Not every client’s risk tolerance and hedging strategy is the same, but we trust the above report will help you put into perspective the risk/reward opportunities at this time. I invite you to call one of our energy analysts to help you plan a hedging strategy appropriate for your situation.

Ray Franklin
Senior Commodity Analyst