Analysis: Dallas Fed survey perceptions plunge; summer power prices may follow

Houston — Texas manufacturing and service sector survey indexes this week show sharp decreases in production, sales and employment for the second month in a row, which industry observers see as evidence that this summer's power prices may be suppressed by the pandemic's lingering economic effects.

The Federal Reserve Bank of Dallas' latest Texas Manufacturing Outlook Survey's seasonally adjusted current production index – the percentage of respondents reporting increased production compared with the previous month, minus the percentage reporting decreased production – slid further into negative territory to negative 55.3%, versus the March survey's negative 35.3%.

The Dallas Fed's latest Texas Service Sector Outlook Survey indicates a similar negative trend, falling to negative 47.8% from the previous month's negative 44.5%.

But the revenue index inched up slightly from an all-time low of negative 67% in March to negative 65.4% in April.

'DRAMATIC CONTRACTION'

"The Texas service sector continued to see a dramatic contraction in April amid the coronavirus (COVID-19) pandemic and mitigation measures, according to business executives responding to the Texas Service Sector Outlook Survey," a news release states. "Perceptions of broader business conditions remained extremely pessimistic in April, while uncertainty continued to escalate. The general business activity index declined nearly three points to a new low of -81.7, while the company outlook index improved nearly six points but remained deeply in negative territory at -69.5."

The manufacturing survey's results were announced Monday and the service sector survey's results were announced Tuesday.

In responses about survey respondents' assessment of general business activity, the index delved more deeply into negative territory, among both manufacturing and service sector respondents. The April survey showed 73.7% more manufacturing respondents percieved shrinking business activity than perceived growth, compared with 70% in the March survey.

On the service side, 81.7% more respondents perceived shrinking business activity than perceived growth, compared with 78.8% in the March survey.

LOADS UP, PRICES DOWN

So far this year, Electric Reliability Council of Texas daily peakloads have averged about 1.2% more than the same period of 2019, but ERCOT's systemwide hub day-ahead on-peak locational marginal prices have bee down about 4.5% for the year, reflecting cheaper fuel and demand that is less than it would have been, absent the novel coronavirus pandemic.

ERCOT's recent assessments of the pandemic's effects on power demand have shown a decrease in daily peaks of 4 to 5%, compared with what they would normally have been, given weather conditions, and loads have been consistently 6 to 10% lighter during the morning ramp than would normally be.

At the Houston Ship Channel, spot natural gas averaged just $1.777/MMBtu so far in 2020 through Tuesday, down from $2.79/MMBtu for the comparable period of 2019.

"While April has had fairly high load, that is purely due to the very hot condition throughout the [independent system organization]," said Campbell Faulkner, senior vice president and chief data analyst at OTC Global Holdings, an interdealer commodity broker.

"Variation during this time of the year is expected, but I am still on the skeptical side that the peak loads this summer will be anywhere near what occurred in 2019," Faulkner said in an email. "Fundamentally, it feels like the economic damage will not be erased by the time Texas hits the [summer] strip. A prominent factor will be not only the economic re-start, but how many [workers] just never return to their former offices. If workers are able to work at home en masse and are not forced back into commercial space, it will weigh on the total peak for ERCOT this summer."

But Travis Whalen, a power market analyst at S&P Global Platts Analytics said, "While peaks have been shaved by COVID throughout much of this month, there have still been a number of strong days driven by high temperatures."

"That suggests that the most important pricing days this summer will still see their full expected peak, or close to it, especially since the manufacturing impact will be lessened by then," Whalen said Wednesday.

Joshua Rhodes, a research associate at the University of Texas Energy Institute, said, "I think in general we will see lower demand and thus lower prices this summer."

A change in the calculation of the Operating Reserve Demand Curve adder, which increases as reserves diminish to scarcity levels, that is designed to have the adder employed more often at higher levels, should, other things being equal, "increase prices at higher levels of reserves, but we might not see its full effect this summer," Rhodes said in an email.

"Even as the economy opens up, I don't think it is going to be as much of a 'V-shaped' recovery as most would like to see," Rhodes said.