The Energy Exchange Podcast Episode 10: Electricity & Weather Events

Host Gary Sutton sat down with Michael Hershey, Director of Electricity Supply at Shipley Energy, to discuss how electricity gets priced in the PJM market and what businesses and homeowners can do to protect themselves when prices spike.

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Key highlights from the conversation include:

• How the day-ahead and real-time electricity markets work, why they often diverge, and what drives those price differences, from shifting weather to unexpected generation outages.
• What the capacity market is and why it matters: assigning value to generation that sits idle most of the year so it’s available when extreme weather pushes the grid to its limits.
• What happened during Winter Storm Fern… when real-time electricity prices hit above $3,000 per megawatt hour compared to a typical range of $50–$100… and why that event will factor into how generators price risk going forward.
• How growing summer demand from data centers, EV adoption, and appliance electrification is raising peak load risk, and why solar’s end-of-day dropoff is creating a new pricing phenomenon in the PJM region.
• The difference between fixed pricing, block and index, and pass-through products… and how commercial and residential customers can use each to manage exposure without betting everything on market timing.
• Why natural gas prices are a useful signal for electricity buyers, and how locking in a term before summer or during price volatility can bring cost certainty whether you’re budgeting at home or running a business.

Enjoy more episodes of the Energy Exchange podcast.

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Transcript from Episode 10

Gary Sutton: Good morning, I’m Gary Sutton, and welcome to another Shipley Energy: Energy Exchange. And this morning, my special guest is Michael Hershey, Director of Electricity Supply. Good morning, Michael. How are you?

Michael Hershey: Good. How are you?

Gary: Michael, I’m doing well. Big question here, Michael, is how does electricity get priced in the PJM market? I mean, what are the main factors that determine what customers ultimately pay for power?

Michael: So, it’s a very complex process, and there’s kind of two components to it. There is the forward market and the day-ahead and real-time market. So the day-ahead market essentially is everyone bidding in to determine what the price of power will be tomorrow. And then the real-time market is what actually happens on that day.

So day-ahead kind of accounts for what predicted weather, many other factors. Real-time is essentially what really happens. So if the weather is different, that can impact price.

If generation goes offline for any reason, mechanical problems, that can impact price. Makes sense. So that’s kind of the primary driver of that.

Gary: What about capacity market? What’s that all about?

Michael: So the capacity market, the general concept is that it assigns a value to the existence of generation, even if it’s not actively running, with the idea that during extreme temperatures, storms like Winter Storm Fern that we just saw, we have that capacity available, even if it doesn’t run for the majority of the year. This makes it economically viable for them.

Gary: Weather seems to drive a lot of the headlines around the country right now, but why do extreme weather events have such a big impact on the power markets, especially electricity?

Michael: So typically weather drives demand. That’s the biggest driver across the board. When we get into those extreme events like Winter Storm Fern, there’s a few things that were unusual about this.

First, we hadn’t seen anything like this in a very long time. Electricity patterns of usage have changed since the last major storm like this. So there were a lot of unknowns, and that drove a very big risk premium.

As we went through the storm, things started to settle out a little bit, and I think everyone was happy that PJM was able to keep the lights on, but it did come at the cost of very high energy prices during that event.

Gary: It was like the perfect storm. You had all this snow coming down at once and then followed by an Arctic front coming in, and it was really where we got used to words like snow-crete and all those kind of things. But obviously there’s a lot going on behind the scenes that caused electricity to spike during that time. Talk a little bit about what happened.

Michael: So the peak hours during the winter are typically in the morning when everyone turns their heat on, and then in the evening when everyone gets home from work, and those were really the riskiest hours during this.

In the end, the total load was a little bit less than expected, which was good and helped bring down prices slightly. However, we were close to setting several records all-time, and I think there was a lot of fear going into it. We would see blackouts or actual mechanical issues with the grid.

Luckily, PJM, I think, did a very good job during this to keep everything running. But the costs were extreme. We saw energy prices real time hit above $3,000 per megawatt hour.

Just as a reference, typically this time of year would be between $50 and $100 per megawatt hour. So you kind of see how that translates to higher energy prices. And going forward, now that we’ve kind of seen this can happen, retailers and generators have to price in that possibility in the future.

Gary: We’re talking with Michael Hershey this morning, Director of Electricity Supply here on our Energy Exchange. Michael, obviously we’re starting to move into some nice weather, but we get into the extreme weather during the summer too with extreme heat, and a lot of people hear about how it pushes the grid to its limit. How does high demand for air conditioning affect the PJM system and market prices?

Michael: So summer’s always been PJM’s peak versus the winter. We have more AC usage than electric heat. The risk has gotten higher in the past few years. We’ve seen more load come online.

Data centers certainly don’t help with that. We’ve also seen more electrification of appliances, electric vehicles, everything like that that adds to that summer demand. And in the past few years, the solar generation has increased.

And there’s a bit of an odd phenomenon near the end of the day, around 5 to 6. As solar starts to roll off, there can often be a spike, as other generation is not available to take up the slack as quickly at a low price. We’ve seen that in other grids. California’s had the duck curve, usually what it’s referred to for many years.

In some cases, it can eventually offset to the point that it is cheaper even with that spike. But it’s a new thing for PJM, and it’s a new thing to deal with and try to model accurately.

Gary: Michael, for homeowners and businesses buying electricity, what are the biggest risks during volatile markets like we’ve seen recently?

Michael: For end users at the residential level, the utility price-to-compares are set with auctions. So they go out to larger suppliers, split up the expected demand to reduce risk. And that’s how that price, the energy portion at least, of the price-to-compare is set. So those generators now have to take into account all of these new risks. And that tends to add more cost as a risk premium.

On the choice market, which is what we offer, we have longer fixed terms to lock in prices. And while we have those same challenges, we’re able to react much more quickly with our pricing. And we’re able to offer longer terms to lock in those prices.

Gary: You’ve probably touched on this a little bit. But for people now that are looking at strategies that they could use to manage the risks that come up in choosing an electrical supply plan, what are some of those strategies that customers can use?

Michael: Well, we all know it’s very hard to time the electricity market or the stock market or any market. I look at it as a way to reduce risk. So if you think that prices are on the rise, it might be a good idea to lock in for a certain term. It depends on your usage.

If you use more in the summer, I would recommend locking in before summer. If you use all year round, it might be better to lock in a longer term. And it gives you some cost certainty, which is always helpful budgeting, either at the residential level or even the commercial level.

Gary: We hear words like fixed pricing, block and index, timing purchases. Talk a little bit about those, if you would.

Michael: So residential, typically we offer fixed prices. They don’t change over the term, no matter what happens.

Commercial is a little bit different. So we offer some pass-through products that pass through certain components besides energy. This means that there’s less of a risk premium for them, but there’s also more risk that those prices could change over the term of their contract. So it’s kind of a way to manage risk but not completely lock it in.

Block and index is similar to that. It’s the energy portion that’s left up to the market. And you can choose a certain percentage, so you don’t have to leave everything up to the real-time or day-ahead market.

You can say we want to lock in two megawatts and everything else we leave at market rate. And it just depends on your usage. Over a long term, that can often be cheaper. But if you have that during Winter Storm Fern, you would have a pretty big bill for a couple of months, even if it is evened out over the next year or two.

Gary: Finally, Michael, if you’re a business or you’re a homeowner, and you’re trying to be smart about how to lock in your electricity rates, what market signals or trends should you be paying attention to? And how could Shipley Energy help with that?

Michael: On the residential side, I think it’s best that consumers pay attention to the broader market. A lot of the data around specific pricing is challenging to either get or to understand.

A perfect example is kind of where we’re at this morning. Prices are very volatile. And while electricity doesn’t directly follow oil and other petroleum products, it does follow natural gas pricing.

And we’ve seen that up fairly significantly over the past week. And that can often signal electricity prices increasing. So right now, there’s a chance that it goes down over the next few weeks and that this was all overblown.

But there’s also the chance it goes up. So it’s kind of up to the end user how much risk they want to take and do they want to lock it in and not have to worry about it for one or two years. Keeping our eyes on the electrical supply and how it all works.

Gary: Michael, thank you so much for your time this morning.

Michael: Thanks for yours.

Gary: Michael Hershey, Director of Electrical Supply right here at Shipley Energy. They’re always here to help and ready to help you today.

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Don’t wait for the next market spike to rethink your electricity strategy. Contact Shipley Energy today to explore fixed-rate and flexible supply options that match your usage and your risk tolerance.

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