Executive Summary:
Whereas no question, the winter of 2022/23 saw record warm temperatures whose impact are a US natural gas storage system forecast to be near record high levels, depressing the forward part of the gas curve, which in turn has impacted the entire gas forward curve.
Further the warm winter has decreased MISO power prompt month price, depressed the front end of the MISO power forward curve, and pulled down the back end curve as well.
However, indicators such as MISO spark spreads and market heat rates as well as significant resilience in the back end of the MISO power curve notwithstanding the front-end movements, all point to a tightening MISO power market driven by coal and nuclear retirements and little to no new gas fired generation construction.
While off their 2022 highs, the gas and power forward curves are both higher today than there were at this same period one year ago.
Most tellingly, MISO market heat rate year to date is up to over 18,900 YTD 2023, well over its long term average of 9,500/10,000 and same period 2022 of 12,200. 2022 full year market heat rate was 16,210 (see Figure 1).
These indicators all support our thesis that MISO is short on generation. Of note, there are no combined cycles scheduled to start construction in 2023 or the foreseeable future.
US Natural Gas. Oddly enough, the forward curve for natural gas is higher today than the same period last year see figure (2) and (3). Realize that the price of natural gas and power tend to be highly seasonal. The forward average price of natural gas today is $3.58[1], whereas the trailing year number is $3.10. For reference, the forward average gas price in September 2022 was $4.48, and in mid 2020 was $2.25.
Figure 2: TTM NG1, very troubling
Figure 3: NG1 forward curves at various dates
Much less troubling – red above green
Lack of winter power demand created a large supply imbalance. Whereas this imbalance did impact the forward market, its impact was far more muted throughout the curve duration as the market is seeing through this event.
MISO Power We use MISO power[2] as a barometer of the US power market. MISO power correlates to Midwest gas[3] strongly exhibiting R2 of 0.82 to 0.89, which is highly correlated.
Whereas there have been strong price moves down in Midwest power, the fundamental indicators of market instability remain very evident, and support our thesis that MISO is short generation.
Realize that there is only one 500 MW gas fired combined cycle power project under construction in MISO today, and there are 2,000 MW in very early development stage that are many years away from commencement of construction[4]. Over the past five years, MISO has retired over 10,000 MW of coal and oil projects, and in the last six months of 2022, an additional 3,000 MW was decommissioned in Northern MISO.
We look at prompt month power price, forward curve price, historical price histogram, market spark spread and market heat rate. These indicators all point to a very unstable market that should expect considerable volatility for the foreseeable future.
Power Price. Power prices typically follow an annual pattern. Not only do the prompt month prices vary my month, their movement tends also to affect the then current forward curve. Therefore, we look the current prompt month price of course, see figure 4, but more importantly, the current price relative to same period of prior years.
Figure 4: TTM MISO Peak Day Ahead
Figure 5: Last five years MISO Peak Day Ahead
Figure 6: Zoom of Year to Date MISO Peak Day Ahead vs prior years
The March 1 MISO power price is $42.02, this is 26% lower than the same period last year of $56.74. 2023 power is still the second highest in the 6-year period shown.
The forward curve is presented from the perspective of four dates, today, one year ago, September 2022 (a near all-time high data point) and in June 2020, see Figure 7. Today’s forward power price is $55.64, above the year ago price of $50.78, however below the high water mark of September’s $69.89, and well above June 2020’s $32.90 price.
Figure 7: MISO Forward Curves at various times
Market Heat Rate. The Market Heat Rate is the overall efficiency of the power market. A heat rate of 10,000 Btu/kw-hr means that if fuel, for example natural gas, costs $4.00 / mmBtu to the power plant, the cost to produce power would be $40/MWHR[5]. If the heat rate was 15,000 the cost of power would be $60/MWHR, etc. Heat rate matters, drives market price of power, and is an indicator of the efficiency of the power market. As demand outstrips supply, more and more inefficient units need to operate longer.
Here is the big problem: MISO[6] has historically been a 9,500 – 10,000 heat rate system. See figure 8. In the price challenged year of 2022, the MISO market heat rate increased to 16.21 (32% increase over the long-term average MISO market). The 2023 year to date heat rate is 18,980, and we have not had a lot of demand in this warm winter. Same period 2022 heat rate was 15,720, or 2023 is running 20% over the challenged 2022 year, and 55% more than long term average. Also, volatility of the heat rate time series is increasing as well.
Figure 8: long term MISO heat rate
Figure 9: MISO heat rate 2022
Figure 10: MISO market heat rate relative to prior years
Spark Spread. The spark spread is the gross margin in $/WHHR that a 7000 heat rate combined cycle unit would make given the then current market price of gas and power. MISO has been a long term $15.84 spark spread market (over the period 2013 to 2020) exhibiting low volatility. For 2022, the spark spread averaged $38.21 (the largest spark spreads are in the summer months when load is highest). Year to date, MISO spark spread has been $30.99 well over the same period last year comparative of $25.92.
Figure: 11 MISO Spark Spread YTD 23
Figure 12: MISO Spark Spread Prior Year
Figure 13: MISO Base Line Spark Spread
Summary: We were concerned last year at this time that the summer power markets might become volatile, and we saw a remarkable climb in pricing across all power products. We were concerned for the same reason we are now: volatility is growing, spark spreads are expanding, and heat rates have grown to unhealthily levels. Relative to spring 2022, all but one of our market indicators are WORSE off today than they were at this time last year, see our paper “What goes up and … Doesn’t Come Down …”, May 2022..
[1] Average Forward Price means the average values of each element of the forward curve from a measurement start date of December 2026 through the end of the relevant data set. This heuristic is empirically derived. [2] By Midwest or MISO power we mean the Indiana Hub day ahead peak prompt month (month 1) power (FMIPM1) [3] By Midwest gas we mean TCO Columbia pipeline first month contract. This is gas in the Midwest region, and has traded at a discount to the national benchmark, Henry Hub gas. [4] Source: Enverus Prism database [5] 10,000*$4/10,000*1,000 [btu/kwhr*$/mmBtu*mmBtu/Btu*kw-hr/MW-hr [6] MISO heat rate means the Bloomberg Indiana Hub Day Ahead Peak Heat Rate Index (FPHIM1