PJM Term Outlook 2016-19 – Premium gas zones will continue to prop up sparks until pipelines are completed
For the first time since 2013, PJM West Hub on-peak spark spreads are set to clear lower year over year between 2016 and 2019. This is a direct result of new combined-cycle power plants coming on line to fill the retirement gap along with higher Marcellus-sourced gas prices due to increased power demand. As PJM continues to add to its combined-cycle fleet in zones behind Marcellus pipeline constraints as well as in load zones downstream, we expect spark spreads to continue to march downwards through 2019. However, we still believe PJM will outperform the current forward market.
The demand zone gas zones that are marginal within PJM will remain at wide premiums to Tetco-M3 and other Marcellus gas prices until large pipeline projects are completed. This gas spread dynamic combined with the remaining marginal coal units will help keep PJM spark spreads elevated through 2019. Also, even as fuel inputs and marginal costs have dropped substantially for peaking generation, offers for these units remain high and keep the far right of the PJM supply stack fairly steep.
However, we do expect reserve margins to climb in PJM as the Marcellus-hungry combined-cycles come on line, creating a more efficient dispatch and reducing the likelihood that PJM prints at shortage levels. We are also bearish that the BGE and Pepco congestion, which has helped keep spark spreads elevated at West Hub in 2015 and 2016, will be relieved as transfer capability to Southwestern Mid-Atlantic Area Council increases and three large combined-cycles come on line in BGE and Pepco zones.