North American Merchant Wholesale Electricity Prices: Overall Subdued, but No Escape From Price Volatility

Project Finance

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The past four years have been highly variable for merchant wholesale electricity prices in key North American merchant power markets, showcasing their volatile nature. Merchant electricity prices can fluctuate widely because they can be affected by a large number of factors, causing their inherent volatility. The Coronavirus Disease (COVID-19) pandemic depressed wholesale electricity prices in 2020 to some of the lowest levels observed over the last 10 years, but in the subsequent recovery, the challenging macroeconomic environment drove wholesale electricity prices to new highs in 2022. In 2023 (as of October), wholesale electricity prices have been materially lower compared with 2022. One of the growing concerns going forward for the electricity sector is the impact of unpredictable weather and climate change, which can materially affect power demand and electricity prices.

“In the absence of bilateral long-term contracts, merchant power projects (which are mostly structured as project finance transactions) are generally subject to significant electricity price volatility, facility output variability, and fuel cost uncertainty (as applicable), leading to less stable credit metrics and lower credit quality,” said Jaideep Nagpal, Vice President, Project Finance at DBRS Morningstar. “Accordingly, the financial metrics used to assess the credit ratings of a merchant power project are more stringent compared with a contracted power project.”