Energy Management

Current Challenges in the Illinois Energy Landscape

5 min read

Have you ever heard the saying “the cure for low prices is low prices”? Years of falling natural gas and power prices moved by the growth of technology from the shale revolution may be the cause for this old phrase to come back around.

Due to a prolonged time of surplus in the natural gas market, NYMEX prompt month gas futures fell to a 17-year low of $1.61/MMBtu on March 17th. Since then, it has rallied to a 14-month high of $2.98/MMBtu on July 1st. This 80% gain in the natural gas market took many by surprise. It should serve as a warning to energy buyers that prices will not be low forever. Sustained time of low oil and natural gas prices is now having an adverse impact on production. At the same time, long-term gas demand is coming online to take advantage of a cheap and ample supply. This tightening of the supply-demand balance in the natural gas market could mean that energy buyers should prepare for possible rising prices and potential volatility for the first time in years.

The Illinois market faces a special set of challenges. Years of low power prices resulting from falling natural gas prices and an increase in wind generation entrances has driven a rash of announced baseload coal and nuclear unit retirements within the state. While much of the country has also come across a number of retirements in recent years, Illinois is unique. This is due to the finite amount of new natural gas fired generation being built to replace the outbound generating capacity.

Also, MISO, the operator of the electrical grid in central and downstate Illinois, is planning major changes to the region’s capacity market structure. These changes along with the current state and federal energy policy debate, signals the chance of a shifting landscape for Illinois energy buyers in coming years.

Current Natural Gas Price Trends

In the past, Illinois energy buyers have been able to count on falling gas and power prices. Though, we are starting to see the impact of a sustained low-price environment on natural gas and power markets.

Despite the belief that low energy prices will last forever, we have seen prices rise off of multi-year lows due to changes in supply and demand fundamentals. NYMEX prompt month gas has rallied by over a dollar since the 17-year low in early March. Longer-dated NYMEX futures prices have also increased 12-25% since falling to life-of-contract lows earlier this year. Low natural gas and oil prices have caused producers to cut back on output at the same time that LNG exports, pipeline exports to Mexico and power sector gas burns are rising. This recent dynamic of lower supply and more demand in the natural gas market has created the perfect storm for higher energy prices going forward.

Current Power Price Trends

On the power side of the market, forward prices for 2017-2020 have also risen in response to higher natural gas prices and forecasts for a hotter-than-normal summer. Forward power prices at Northern Illinois Hub have increased 8-9% since reaching all-time contract lows in late-February. Although forward power prices are still lower than their year-to-date highs from this spring, prices have regained upward drive this month. Weather forecasts show that the hottest temperatures are set to occur in the second half of summer.

Despite the constant rally in prices, there is still a lot of value for energy buyers in the current market. Forward natural gas and power prices remain several percentage points below the price levels we saw this time last year. Since much of the price increase this spring has been weather-driven, it has affected near-term prices. Longer-term energy prices for 2018-2020 delivery years have seen modest rises. In some cases, natural gas and power prices are now backwardated. This means that prolonged contract terms can result in lower fixed costs since 2018-2020 prices are trading at a discount to prices for 2017. For example, as of July 1st, the 2017 NYMEX calendar strip is trading at $3.18/MMBtu while prices for 2018-2020 strips are within a narrow range of $3.00 to $3.06/MMBtu. On the power side, ComEd forward power prices for 2017-2019 are trading within a tight 40 cent per MWh range.

Capacity Costs on the Rise

While energy prices have fallen to multi-year lows this year, many customers have been surprised to find that their contract prices have not fallen by as much as expected. This is due to rising capacity costs in Illinois. With capacity typically being the second largest charge on a customer’s supply bill, higher costs for capacity have offset some of the benefits of falling natural gas and power prices. Both Ameren and ComEd customers have been affected by rising capacity costs in recent years.

In northern Illinois, PJM launched a FERC-approved pay-for-performance tool in the capacity market known as Capacity Performance. The goal of Capacity Performance is to increase reliability to ensure that generators meet their commitments to bring power during times of extreme system conditions.

According to PJM, this new capacity market tool should limit price spikes and produce savings for customers during events such as the Polar Vortex. Since the start of Capacity Performance, capacity prices have risen as generators now take more steps to assure their reliability during hours of highest system demand. During the first two PJM capacity auctions that involved Capacity Performance resources, ComEd zonal prices cleared higher than $200/MW-Day, or $16.66/MWh for a 50% load factor customer. Capacity prices in ComEd have cleared the auctions for planning years 2018-2019 and 2019-2020 at higher rates than other areas of the PJM market.

Meantime, in the MISO market that covers central and downstate Illinois, customers have faced rising and volatile capacity prices. In the 2014-2015 planning year, capacity rates cleared at only $16.75/MW-Day. Prices increased to $150/MW-Day by planning year 2015-2016, still substantially less than prices in the PJM territory. For the 2016-2017 planning year, prices fell back to $72/MW-Day, but were still well above where capacity prices have cleared in the MISO market for southern Illinois in the past.

A Challenging Environment for Generators

Falling natural gas prices pushed 2017-2020 forward power prices to new, all-time contract lows in the Illinois markets earlier this year. Wholesale energy prices in the state are among the cheapest in the country thanks to plenty of baseload nuclear generation. While these low prices are opportune for energy buyers in Ameren and ComEd, the sustained low energy price environment has shown major challenges for merchant generation within the state.

Over the past several months, nearly 5 GW of coal and nuclear generation will be retired or mothballed across the state. Another 500 MW are planned for potential retirement. Most of these proposed retirements will occur in the MISO footprint (Ameren). According to some reports, more than 30% of the region’s total generation capacity could be shuttered by mid-2017.

At the same time baseload generation units are retiring in the state, very little new natural gas fired generation is being built. According to the EIA’s Annual Electric Generator data, only one 600 MW natural gas fired combined cycle turbine (Nelson Energy Center) has been built in northern Illinois since 2012. There are zero scheduled to be built before 2020. In contrast, across the rest of the PJM states, over 22 GW of new natural gas fired generation are likely coming online before 2020. Most of this new natural gas fired capacity is being built near the Marcellus and Utica shale plays in the eastern half of PJM in order to take advantage of cheap and ample fuel. The number of generation retirements combined with a lack of new natural gas fired generation presents upside risk for power prices in the ComEd and Ameren markets.

Develop An Integrated Energy Strategy

Energy buyers in Illinois face a number of challenges. At Constellation, we have the size, scale and resources to help protect you from market risk. We can help you develop energy management solutions to protect your bottom line. For more information, visit

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