Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why PJMs Emergency Grid Actions Matter for Energy Prices
Transcript
- Lucas: So PJM, the largest power grid operator in the country, has escalated emergency actions to avoid blackouts. This is not a drill — it's July 4th weekend and they're publicly warning that demand could outstrip supply. Luna: And this comes after weeks of extreme heat across the eastern US. But PJM has been sounding alarms about capacity for a while now. What's the specific trigger this time? Lucas: It's a convergence of things. First, the heat wave is persistent — not just a few hot days but a prolonged stretch that's driving air conditioning use to record levels. Second, there's the data center demand surge. PJM's region covers 13 states and DC, and it's become a prime location for new AI and cloud computing facilities. Luna: Right, I've seen estimates that data center power demand could grow 15 to 20 percent annually through 2030. That's a massive additional load on a grid that's already tight. Lucas: Exactly. And PJM's capacity market — the mechanism that pays power plants to be available — has been clearing at higher prices, but there's a lag. Some older coal and nuclear plants have retired faster than new gas or renewable capacity has come online. Luna: So what are the emergency actions they're taking? I saw the headline but not the details. Lucas: They've activated what's called 'maximum generation alert' — basically telling all available generators to be ready. They're also deferring maintenance, reducing voltage, and in extreme cases they can ask large industrial customers to curtail usage. They haven't gone to rolling blackouts yet, but they're closer than they've been in years. Luna: And this is happening while natural gas prices are actually up. Henry Hub is at $3.33 per million British thermal units as of June 29th, up from $3.26 a week prior. So gas-fired plants are running more, and that's putting upward pressure on fuel costs. Lucas: Which feeds into electricity prices for consumers. But here's the interesting part — oil prices have been sliding. WTI crude is at $71.90 per barrel, down from recent highs. So we have this divergence: oil weakening because of global demand concerns, but natural gas rising because of domestic power demand. Luna: Makes sense. Oil is a global commodity, gas is more regional — and right now the regional story is all about the grid. But what about renewables? Solar and wind are supposed to help with peak summer demand, but they're not dispatchable the same way. Lucas: That's exactly the tension. Solar output peaks during the day, which is great for air conditioning loads, but the grid still needs firm capacity for the evening ramp when solar drops off. PJM has been trying to integrate more renewables, but the interconnection queue is backlogged, and some projects are getting delayed. Luna: And we saw this week that Enphase Energy dropped 9.5 percent over the past five days. First Solar fell more than 6 percent. So clean energy stocks are getting punished, even as the grid crisis would seem to argue for more distributed generation. Lucas: Investors are pricing in headwinds — high interest rates, policy uncertainty, and the fact that these emergency actions highlight reliability gaps that gas can fill more quickly. NextEra Energy, the largest utility owner of renewables, was down slightly too, but not as much as the solar pure plays. Luna: So is this a short-term blip or does it signal a longer-term shift back toward natural gas? I'm thinking about the power plant developers who might look at PJM's emergency and say, 'See? We need more gas plants.' Lucas: That's the debate. On one hand, the urgency is real, and gas-fired plants can be permitted and built faster than large-scale solar or wind. On the other hand, the Inflation Reduction Act incentives for clean energy are still in place, and many utilities have decarbonization targets. Luna: But if the grid is this tight, you'd think battery storage would be a slam dunk. Store solar during the day, discharge in the evening. What's holding that back? Lucas: Battery storage is growing fast — deployments doubled last year — but it's still a fraction of what's needed. Supply chains are improving, but interconnection delays affect batteries too. Plus, the economics depend on capturing price spreads, and those spreads are volatile. Luna: And honestly, if walking through the economy with us has made something click — if this episode was worth a coffee to you — that's the link. It's buy me a coffee dot com slash fexingo. No pressure, but it helps keep the show ad-free. Lucas: Yeah, it really does. We get notes from listeners saying they appreciate the no-nonsense approach, and that kind of support is what makes it sustainable. So if you're inclined, that's the place. Luna: Alright, back to the grid. So PJM's emergency — is it likely to lead to policy changes? Like, will states start subsidizing new gas plants? Lucas: We're already seeing that. Ohio and Pennsylvania have considered legislation to classify natural gas as 'reliable' or 'dispatchable' in a way that makes it eligible for certain state incentives. But there's pushback from environmental groups and from some utilities that have already invested heavily in renewables. Luna: And from the Federal level, FERC — the Federal Energy Regulatory Commission — has been pushing for reforms to PJM's capacity market to make it more responsive. But that's a slow process. Lucas: Right. FERC issued an order last year requiring PJM to change its minimum offer price rule, which had been discouraging new entry. But the implementation has been messy. And meanwhile, the grid is under stress now. Luna: So what's the bottom line for energy prices? If you're a consumer in PJM territory, should you expect higher bills this summer? Lucas: Almost certainly yes. Wholesale electricity prices in PJM have already spiked on hot days, and those costs get passed through to retail rates eventually. Natural gas prices are up, capacity costs are up, and if we see actual load shedding, it could push prices even higher. Luna: And for investors? The energy sector has been a mixed bag. XLE, the energy ETF, is down 1.2 percent over the past five days. But ExxonMobil is actually up slightly. Chevron is down a bit. Lucas: The market is distinguishing between companies with natural gas exposure versus pure oil. ConocoPhillips is down 1.2 percent in the same period. So the gas narrative is helping some, but the overall energy sector is still dealing with oil weakness. Luna: Let's zoom out for a second. PJM's crisis is a symptom of a bigger challenge: how do you keep the lights on while transitioning the generation fleet? And that's not just a PJM problem — it's happening in ERCOT in Texas, in California ISO, everywhere. Lucas: Each region has its own dynamics. ERCOT is energy-only, so prices can spike higher during scarcity. PJM has a capacity market, which provides a revenue stream for plants to stay available. But both are feeling the strain from retirements and demand growth. Luna: And the demand growth piece is key. We talk a lot about AI data centers, but there's also manufacturing reshoring, electrification of vehicles and heating, and just population growth in certain areas. Lucas: All of that adds up. The Energy Information Administration projects US electricity demand will grow about 2.5 percent per year this decade, after being nearly flat for years. That's a huge shift. Luna: So the old narrative that energy demand is stagnant is dead. And that changes the investment case for everything from natural gas pipelines to transmission lines to renewable projects. Lucas: It also changes the policy conversation. Suddenly, permitting reform isn't just a nice to have — it's critical for reliability. And the tension between building fast and building clean is front and center. Luna: I think that's where we'll see the most interesting developments in the next year. How do regulators balance the immediate need for dispatchable power with long-term climate goals? Lucas: It's the defining question of energy economics right now. And PJM's emergency actions are a real-time stress test of the system. If they manage to avoid blackouts, it's a win for the market design. If not, we could see a policy scramble. Luna: Alright, let's check back in a month and see how this summer shapes up. Thanks for walking through it with us. Lucas: Stay cool out there — literally and figuratively. We'll be back soon.