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Market volatility in October caught many off-guard and the hope was things would settle down post earnings.  Well they got much worse spurred by the disruption of the CA fires.  PCG and EIX ended November down 44% and 20%, respectively, on the heels of the destructive fires.  These were popular value names in the utility space and their sharp stock collapses clearly caused investor pain.  However, the second derivative impact was just as meaningful.  The “Anything but California” trade took over amidst utilities, lifting already expensive low-risk utilities to higher levels.  Many investors got just as hurt by being short or underweight these names as being long CA.  With investors suffering and year end approaching, the last two weeks have showed signs of portfolios shrinking and extreme risk-aversion which has only exacerbated the problem.  Everyone needs a holiday.

The annual EEI conference will be held November 11-13.  Management from most of our covered companies will be there.  This report is a helpful guide for investors attending and includes questions to ask each company and summary model information.  Some of the industry topics we will be focusing on include:

This week we take a look at power prices ahead of Q3 reports, as generators often mark their guidance to forward curves around the end of each quarter. This is particularly meaningful for both NRG and VST, who are expected to issue / refresh 2019 guidance. Aside from ERCOT 2018, the forward pricing story in Q3 was largely positive when compared to 2Q18, even amidst flattish natural gas. While ERCOT contracts were down 10% in 2018, further out on the curve (2019-2021) was up 5-10%. This dynamic is likely explained by a summer that failed to yield scarcity pricing despite peak demand records, but the recognition that supply/demand conditions are likely to remain tight for the foreseeable future. Gas plant new build has failed to move forward and core demand growth remains robust. In PJM, contracts were up 5-7% in 2019-2020, while 2018/2021 contracts were up only modestly at 1-2%. Finally, out West (NP-15/SP-15/Mid-C) forwards were up 10% for 2019, while more mixed in outer years. 

Last Tuesday (10/20/2018), PJM filed its initial comments (link) to address subsidized resources in capacity auctions. PJM’s proposal has several key tenents: 1) The MOPR (minimum offer price rule) would be expanded to all fuels/technologies and new/existing resources; 2) A resource carve-out option would be available for subsidized resources and these resources (and associated load) would be removed from the market (no capacity payments); 3) An “extended resource carve-out mechanism” would be used to re-price the residual market’s clearing level based on total load (including carved-out resources). As structured, IPPs appear to benefit from what should be higher clearing prices all else equal. For the Integrateds the implications are less simple.