US: Increasing CO2-intensive generation could impact RGGI demand

Fuel switching and increased generation from oil- and coal-fired generation in the New England region could add bullish pressure to the Regional Greenhouse Gas Initiative (RGGI) ahead of the upcoming auction, some traders said.

RGGI, which regulates power emissions from nine northeastern states, will have its first auction on 11 March. The auction will be the first with 15m on offer, a roughly 17% decline from the 18m averaged throughout 2014.

The northeast, specifically the New England area, is seeing another year of significant snowfall and cold weather. According to the National Weather Service, the region is expecting see some warmer weather later this week, which could ease the demand for electricity in the region.

However, market participants said the recent spat of cold weather in early February will likely cause some long-term impact on emissions in the northeast. A trader from a trading house said the market was already reacting to the cold weather in the northeast.

“I think that’s why RGGI is getting bid up a bit recently,” a trader from a trading house said. “[RGGI allowances] probably will clear higher at auction.”

RGGI allowances traded up to $5.60/tCO2e last week, but prices declined slightly on Monday to $5.56/tCO2e.

Some sources cautioned that the increased generation from CO2-intensive sources is not as significant as last year’s polar vortex, which added roughly 5m tCO2e to RGGI’s emissions profile. Those sources said any increase in the first quarter could be offset by a milder summer or fall.

“It seems less bullish than last year,” a broker said of the potential impact on emissions.

Oil- and coal-fired generation coming online

The cold weather in late January and early February is causing oil- and coal-fired generation to come online in the New England region to deal with the increased demand from consumers, according to data from the New England Independent System Operator (NEISO).

Coal- and oil-fired generation made up nearly 22% of the 2.2m megawatts used during the 9-15 February period, which is the most recent data from NEISO. NEISO, which manages power in six RGGI states, typically averages about 7% of its power from coal- and oil-fired generation.

Oil-fired generation accounted for more than 8% of the power during the 9-15 February period. The generation source usually only comes online because of increased demand, pipeline constraints or financial incentives, such as lower oil prices and higher power prices.

The Energy Information Administration (EIA), a government agency, noted the lower temperatures in the region are causing price spikes and natural gas pipeline constraints. Cash prices on the Algonquin gas transmission line closed at $28.00/MMBtu on Monday, market sources said. The line, which is owned by Spectra Energy, supplies natural gas to the New England area.

Market participants did caution that the increased demand and higher CO2-intensive generation are not on the same level as those seen during last year’s polar vortex. Last year’s winter caused oil and coal-fired generation to make up between 11-24% of the region’s power from 20 January-30 March.

Despite not replicating last year’s weather, two market sources said the colder temperatures will cause compliance entities or speculators to react. A second broker said speculators may be more aggressive while compliance entities may take a more conservative approach.

“It may not be bullish immediately, but it will increase prices,” the broker said. “It could take time to play out.”

A trader from a compliance entity said the market is likely to see some increase in emissions in the first quarter of 2015, but they are unlikely to be as high as the 27m tCO2e reported in 2014. Any increase in emissions could add bullish pressure to the tight RGGI market. Dan X. McGraw