Webinar Analysts: Geopolitical Energy Impacts, PJM Backstop Auction and a Summer Weather Recap
During Constellation’s September Energy Market Intelligence Webinar, the Commodities Management Group (CMG) provided an overview of current and future factors shaping the energy landscape, including geopolitical impacts on energy markets, LNG fundamentals, an overview of the PJM backstop auction and a summer weather recap.
Weather Outlook
The webinar began with a discussion centered on the unusual strength of the current El Niño, the extreme summer heat, widespread drought and the risks that could complicate an otherwise warm winter outlook.
Summer has been unexpectedly hot given the presence of a strong El Niño, which often tends to moderate summer temperatures. The U.S. experienced its seventh-hottest summer overall, with 1,035 population-weighted cooling degree days. Texas and California each recorded their sixth hottest summers, while the East generally ranked between the 10th and 19th warmest.
Looking ahead, the El Niño weather pattern has reached a “supersized” category. Strong El Niño winters have historically been mild across much of the Lower 48 and mild/wet across Europe. Many forecasts point to an above-normal winter, with some even suggesting the possibility of the warmest winter on record. However, the biggest risk to this forecast is atmospheric blocking over northern Canada or Greenland, which can push the jet stream south and bring colder air into the eastern U.S., overriding the warm El Niño influence.
Geopolitical Impacts on Energy Markets
Ongoing conflict in the Middle East has been a major source of upward pressure and volatility for global energy prices as Iranian-backed groups have been disrupting key energy infrastructure and shipping routes. Saudi Arabia’s east-west pipeline runs from the Persian Gulf to the Red Sea and can move roughly seven million barrels per day, including about five million barrels for export. That infrastructure has been damaged shutting the pipeline down, with repairs potentially taking months and tightening oil supply routes toward Asia.
The panelists also emphasized shipping chokepoints, which have impacted both the Strait of Hormuz and the southern Red Sea Strait of Bab el-Mandeb area, where Houthi activity threatened another critical route for oil and refined products. The panelists noted that shipowners may be reluctant to risk vessels or crews, which can add to market concern.
The price impact was clear, with crude prices described as having found a “comfort zone” above $100 per barrel and diesel futures near $200 per barrel. WTI prices have hovered around $103 and Brent around $108, up significantly from earlier in the year, though not quite back to the peak levels seen in March and April.
The situation also affected LNG. Global LNG prices had moved from the mid-teens per MMBtu in July to the mid- to upper-$20/MMBtu, with European benchmarks such as TTF and U.K. NBP rising alongside Brent. Qatari LNG exports were discussed as constrained through the Strait of Hormuz, with little or no recent cargo movement noted via the charts from sources that monitor seaborne traffic.
For U.S. energy buyers, high international prices matter because U.S. LNG exports help supply Europe, and stronger overseas prices can encourage more LNG export demand and future U.S. LNG investment. That can place some marginal upward pressure on regional gas prices in both New England and southern New York. which are especially exposed because imported LNG and dual-fuel generation economics that can tie local energy costs to global LNG, Brent, diesel and fuel oil prices.
PJM Backstop Auction
The webinar also covered the recent PJM Reliability Backstop Procurement proposal and load management initiatives that are intended to reshape the capacity market for both generators and large loads. PJM’s stated goals were to improve reserve margins, lower capacity prices and create a better pathway for new large loads to connect to the grid. The panelists described PJM reforms as especially relevant because electricity prices in more markets are becoming less directly tied to natural gas prices, meaning traditional heat-rate-based assumptions may be less useful for buyers.
Reliability Backstop Procurement (RBP) is a two-track PJM reliability mechanism designed to backstop the capacity market when normal market outcomes may not be sufficient to ensure adequate reserves. Track 1 or Facilitated Bilateral Matchmaking consists of PJM and Charles River Associates matching new load and generation. Parties are left to set terms and conditions of any agreement. Track 2 or Central Procurement occurs when PJM holds a central procurement to cover the shortfall amount minus any qualifying offsets and opt-outs.
Another reliability mechanism that was discussed was Interim Resource Adequacy Service (IRAS). Previously known as “Connect and Manage,” IRAS is a proposed temporary curtailment for new large loads when a resource adequacy shortfall exists. The two major components include a large load registry which applies to new and existing large loads (greater than or equal to 50 MW at a single site), and a pre-emergency curtailment which applies to new large loads (or incremental increases in loads) that connect after June 1, 2027. However, pre-emergency curtailment would only apply to loads that do not have contracts with supply, either Bring Your Own New Capacity (BYONC) or supply allocated through the RBP.
Market Trends and Temperature
The webinar concluded with a look at heat rates, forward power charts, including conversations about “the right time to buy,” the “Market Temperature” and other factors affecting the energy market.
The webinar team will host the next Energy Market Intel Webinar on Wednesday, October 21 at 2 pm ET. Constellation will offer detailed and timely updates on factors affecting the energy landscape, such as weather, natural gas storage and production and domestic and global economic conditions. Register by visiting www.constellation.com/marketintelwebinar.
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