The next year will be a good one for natural gas-fired generators in PJM, according to Morningstar Commodities Research.
A new report by Morningstar analyst Jordan Grimes predicts on-peak prices at PJM’s West Hub will result in “historically high” spark spreads in delivery year 2015-16. Spark spread, a measure of gas plants’ gross profit margin, is the difference between the price received by a generator for power and the cost of the gas needed to produce it.
Grimes says physical reserve margins will tighten due to the retirement of more than 10,000 MW of older coal, gas and oil capacity before June 1.
“New combined-cycle capacity will replace some of this lost capacity, but much of the physical capacity will be replaced with demand response, renewables and expected imports from neighboring ISOs,” he wrote. “When DR replaces physical capacity, it will steepen the supply curve at the same time physical reserve margins drop this summer.”
For a gas plant with a 7,000 Btu/kWh heat rate purchasing gas at Tetco-M3 and selling power at PJM West, that could lead to spark spreads averaging $25/MWh in calendar year 2015 and $22/MWh in 2016, Grimes predicts.
But he says spreads will decline to $18 in 2017 and $16 in 2018 as more new combined-cycle plants are built in PJM and pipeline expansions allows Marcellus gas producers to obtain higher prices from more distant customers.
“There are a few scenarios … that would help keep spark spreads elevated in 2017 and 2018, but the most likely scenario is lower spark spread clears, given the new, more efficient supply stack and higher Tetco-M3 gas prices,” Grimes said.
