Given the amount of new generation coming online, observers of energy trading markets shouldn’t expect to see the return of volatility to those markets in the short term, a top executive with Allegheny Energy Global Markets told an audience of investment professionals attending a Deutsche Bank-sponsored electric power conference last Tuesday.
At the conference, Dan Gordon, president of Allegheny Energy Global Markets, and Kevin Howell, president of Dominion Energy Clearinghouse, were asked to comment on whether they’ve seen energy trading volatility change in the last year or so.
“I think volatility has come down a lot,” said Gordon. “It’s been dampened by the disappearance of a lot of the market players.” The traditional volatility markets “that you would really look to measure volatility — the options markets on these types of commodities — are also virtually non-existent.”
“You have not seen weather materialize, you have not seen generation outages — these types of things that put the buzz back in peoples’ minds that ‘Hey, prices could really jump, prices could move’ and therefore volatility, at least on a forward looking basis, should be higher than it actually is,” he said.
“Volatility right now is low and, from our perspective, with all the generation that’s coming online, we don’t see any reason why it would be rebounding in the short term.”
For his part, Howell said that the one “wild card” when it comes to volatility remains weather. “I think if you have an abnormally hot summer, you get a couple of key units out, you can have volatility in this market pretty quick,” he added.
Gordon also commented on the energy price outlook over the next couple of years. “Our view on the two-to three-year price horizon is still a downward one,” he said. “There is a significant capacity overbuild that has been evident across the United States.”
“We don’t see any reason why prices on a long-term basis should rebound, absent any major regulatory change from an environmental regulation or something like that,” Gordon added. “But, in general, we’re bearish on power prices out, probably about five years.”
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