Although PJM's modifications since last winter might seem bullish at first glance, we think they will end up being bearish by encouraging fewer outages and lower prices. This winter, PJM has implemented increased reserves during cold weather events, raised energy offer caps to $1,800 per megawatt, and is encouraging the use of shortage pricing to procure emergency energy. We expect these moves could raise generators' expected value of nonperformance above their annual capacity payments, encouraging them to ensure they are available. Much lower oil prices also will lead to lower peak clears to the extent that oil is on the margin this winter and no shortage events are triggered. Based on our outlook for fewer outages, we think shortage events are very unlikely this winter and PJM sparks spreads versus TETCO-M3 are still overvalued at these levels. We also believe the new combined-cycle plants Warren County and West Deptford are a net gain to the baseload supply stack, given their high capacity factors. In NYISO zones G and J, we believe heat rates are overvalued, given the lower price of fuel oil at New York Harbor and the refiring of the Danskammer units (530 MW) in Zone G after their Hurricane Sandy mothballing. Although lower oil prices will be bearish fixed-price power in ISO New England, we believe lower Algonquin prices and the Vermont Yankee and Salem retirements carry upside potential at current Mass Hub heat rates versus Algonquin.
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