Commodities 2023: Southeast US power markets face big changes as forwards indicate weaker prices

The Southeast US power sector faces significant change -- new nuclear capacity, a regional balancing power market -- in 2023, and power traders appear to foresee little risk of higher wholesale energy prices, judging from power and natural gas forward markets, but some industry observers question that conclusion.

Southern Company's Georgia Power plans to start supplying the grid from its new Plant Vogtle Units 3 and 4 nuclear generators, with a combined capacity of more than 2.2 GW by the end of March, after starting the fuel loading process in October and completing cold hydro testing in December.

"Vogtle being brought online is both exciting and portends well for the Southeast growing [solar] penetration," said Campbell Faulkner, senior vice president and chief data analyst at OTC Global Holdings, an interdealer commodity broker. "Maintaining inertia is a growing concern across NERC, and stable baseload [supply] from nuclear is the best source available."

The North American Electric Reliability Corporation's SERC Region, encompassing Southern Company utilities' footprints, had an average load of 78.4 GW in 2022; according to S&P Global Commodity Insights. Therefore, the new Vogtle units could increase the area's supply by almost 3%.SERC was formerly known as the Southeast Electric Reliability Council.

However, Faulkner foresees higher -- not lower -- power prices in 2023, despite widespread concerns about a potential global economic recession.

"Prices in 2023 will be higher than 2022 due to lingering effects of global gas prices being bid up as well as thermal coal price hikes," Faulkner said. "Even with the recession clipping some demand, there is too much pricing pressure across the board for fixed-price power to return to 2018-2019 levels."

Forward markets

As of Dec. 29, the 2023 Into Southern on-peak power forward strip averaged $61.51/MWh, down $23.71, or 27.8%, from 2022's year-to-date average day-ahead on-peak index of $85.22/MWh.

Also, the Florida on-peak power forward strip averaged $55.47/MWh, down $33.22 or 37.5% from 2022's year-to-date average day-ahead on-peak index of $88.69/MWh.

Power forward markets tend to be illiquid, which may increase uncertainty about Southeast power markets in 2023.

But gas futures tend to be more liquid, and the 2023 forward strip for Transco Zone 4, important for Into Southern pricing, averaged just $4.721 Dec. 29, down $2.08, or 30.6%, from the year-to-date 2022 average spot index of $6.805/MMBtu.

Florida Gas Zone 3's 2023 forward strip averaged $4.841/MMBtu Dec. 29, down $2.08, or 30%, from the year-to-date 2022 average spot index of $6.916/MMBtu.

"Futures markets suggest that natural gas prices are likely to be a bit lower in 2023 on average compared to 2023," said Greg Upton, associate research professor at Louisiana State University's Center for Energy Studies. "That would suggest that wholesale power prices will also be lower."

S&P Global's latest North American Electricity Long-Term Forecast indicates power prices will be lower in 2023 compared with 2022. The forecast does not include Into Southern, but the TVA forecast for 2023 is almost 30% less than the year-to-date on-peak 2022 index average of $85.63/MWh, and the Florida power forecast is 26% less than the $88.69/MWh year-to-date 2022 average index.

Geopolitical repercussions

The war in Ukraine and resulting sanctions on Russian energy have more closely integrated US natural gas into the international market, Upton said.

"As coal retirements continue, natural gas will continue to be the most important marginal fuel source setting power prices," Upton said, adding that "2023 is likely to reveal more on the extent to which the growth of LNG has tied US markets to international price shocks, and its ripple effects throughout the entire value chain, including power prices."

S&P Global forecast the SERC region to retire 4.2 GW of coal capacity in 2023, up from 3.3 GW in 2022, and NERC's Florida Reliability Coordinating Council to retire 2.7 GW, up from zero in 2022.

Tulane Energy Institute associate director Eric Smith said he expects coal-fired generation to "change status from a long-term contracted source to more of a short-term seasonal peaking supply much as we see currently in Europe."

"Basically, the plants won't run every day but will represent a backstop for periods where natural gas, nuclear and hydro cannot fully offset demand not filled by renewable sources," Smith said in an email.

US natural gas' integration into international markets are likely to boost US gas prices, Smith said.

SEEM impact

OTC Global's Faulkner said the Southeast Energy Exchange Market, which started in November and will have four new Florida utilities participating by midyear "will provide a large contribution to lowering prices via better discovery and allowing participants greater ability to hedge."

"Being able to allocate risk to willing participants should help keep electricity prices lower in the region as compared to if the market was still purely opaque," Faulkner said.

SEEM's startup was a result of the Federal Energy Regulatory Commission's 2-2 deadlock about the proposal. By law, tie votes on items are approved. FERC's reaching a five-person status in 2023 may mean big changes in the Southeast as the commission seeks "to coordinate grid enhancements between various states" and independent system operators, Tulane's Smith said.

"If they are successful, it should allow for more low-cost gas and nuclear power to flow into higher-priced power pools, for example, into [Midcontinent ISO] North from MISO South," Smith said. "Obviously, the low-cost states will not appreciate the loss of comparative advantage and will fight back by challenging the FERC moves towards centralized decision-making."