Getting Hot - and Bothered - by the Possibility of High Prices This Summer

On the first day of May, the Texas Senate Committee on Business and Commerce took up the issue of electric reliability and questioned Texas grid operators about their plans to deal with the coming summer.  Recent media reports of declining reserve margins – driven by recent retirements of over 5,000 MW of electric generating capacity – have been warning of a potential perfect energy storm: expected record high demand, limited excess generating capacity, and heat that could drive prices towards the upper end of the $9,000 per megawatt-hour (MWh) range.

If all of those factors – excessive demand, tight reserve margins, and blistering heat - conspire at just the wrong times, we could see significant volatility in our electricity market with prices pegged out at on the high side.

Demand: ERCOT is forecasting record summer demand – with an estimated 72,756 MW peak load (based on normal weather conditions for 2002-2016). That handily beats the all-time summer peak record of 71,110 MW from August 2016.

Limited Back-up: Meanwhile, the reserve margin – the amount of available generation in excess of expected peak stands at 11%.  That’s well below the May 2017 projection of 18.9 percent, and 4 percentage points below the 13.7 percent target ERCOT established for itself in 2010 (ERCOT says it’s not worried, claiming this situation is temporary). ERCOT’s reserve margin projections have been here before: they dropped into single digits 10 times over the last decade, and have traditionally bounced back.

Heat: ERCOT is expecting a hotter-than-normal summer relative to a 30-year normal.  However, the climate has changed so much in the past three decades that ERCOT has also established a most recent 10-year ‘normal,’ and - within that context of the most recent ten years - expects temps to be “close to normal” (which means HOT).

 

Is This a Recipe for Higher Prices?

We’ve only seen prices ring the $9,000/MWh bell for 10 minutes this January. In most recent years, prices have been far lower on an average basis – with Day-Ahead and Real-Time spot market prices hovering around $29-30/MWh. We haven’t seen much volatility in the past three or four years either.  The graph below (from the most recent Market Monitor Report) illustrates just how infrequently ERCOT prices move into a range that signifies real pain (or joy – depending which side of the transaction you sit on). This may change with this summer’s lower reserve margins, but ERCOT grid operators have signified confidence in the ability of the system to meet demand.

Dowload 2016 State of the Market Report PDF

 

If We Can Get Through This Summer…

We may be on thin ice if we are on the receiving end of a hot summer, and we may see punishing prices for those caught short. Longer term, the addition of a significant amount of new generating capacity - including a good deal of both wind and solar - as well as conventional gas-fired plants will help somewhat.

Additional wind capacity totaling 4,100 MW is already under construction, with over 8,600 MW of wind having approved interconnection agreements. Meanwhile, installed solar will rapidly jump from about 2,000 MW to double that figure, with 2,000 MW of signed interconnection agreements in place and thousands of additional of solar projects under review.

By late 2017, over 47,000 MW of new generation projects were being reviewed by ERCOT, with over 20,000 MW of projects having interconnection agreements, including almost 10,000 MW of dispatchable gas-fired generation that can help firm up renewables.

Until that capacity gets built, markets may see more volatility. Meanwhile, electricity consumers look at the calendar and anxiously await the long hot days of summer.

By Peter Kelly-Detwiler