Texas power market faces little risk of high prices amid weak gas, mild forecasts

Power traders in the Electric Reliability Council of Texas likely foresee little risk of higher prices in the summer, comparing summer forwards with summer 2022 day-ahead on-peak locational marginal prices, probably because of substantially lower natural gas forwards and milder summer weather forecasts.

For example, ERCOT North Hub's June-through-August strip on April 20 had a daily average of less than $68/MWh, down 45.5% from the day-ahead on-peak locational marginal price average of more than $124.25/MWh for June through August 2022.

At the Houston Ship Channel, the summer 2023 forward strip on April 20 was $2.372/MMBtu, down by more than 68% from the summer 2022 spot average of $7.457/MMBtu.

Contrast with second-hottest summer

Three summer weather forecasts were released April 19-20, all indicating that a shift from La Nina to El Nino weather pattern is likely to let Texas pass through June, July and August with an average of no more than two degrees above normal. June-August 2022's 1 to 3.5 degrees above normal marked the state's second-hottest June-through-August on record after June-August 2011.

Forecasts also largely called for near-normal precipitation over much of the state, compared with the summer of 2022, when about 75% of Texas was in severe drought or worse. Atmospheric G2 even forecast wetter-than-normal conditions across Texas for summer 2023.

"The budding El Nino, if the teleconnections between the ocean and atmosphere engage by mid-summer, could have a big impact on the deregulated electricity space," said Ian Palao, vice president for strategic energy services at POWWR, an energy management technology provider, in an April 21 email.

"There are definite risks to the temperature and price downsides in ERCOT," Palao said. "The key is if those teleconnections result in periodic rain (and a less persistent atmospheric cap) in ERCOT by, say, mid-July."

El Nino tends to coincide with a weaker Atlantic hurricane season, and Palao said POWWR expects 13 named storms, seven hurricanes, two major hurricanes and "higher probabilities of landfall along the southern East Coast."

The average number of storms for 1991 through 2020 is 14.4 named storms, 7.2 hurricanes and 3.2 major hurricanes, according to Mark Shipham, Amperon's chief meteorologist.

Concern about price spikes

Campbell Faulkner, senior vice president and chief data analyst at OTC Global Holdings, an interdealer commodity broker, said he expects ERCOT prices to be "on average lower than last summer due to a more favorable spark spread via the decline in fixed-price gas across the [ERCOT market]."

However, ERCOT reliability assessments and market participants "tend to focus on the normalized costs, not the spike on heavy load days."

"Where I worry is the increasing number of days that go from $5.00/MWh then explode as PV generation resources and wind die out to hundreds and thousands of dollars," Faulkner said in an April 21 email. "The mismatch between load and generation is increasingly worrisome as plants need to fast ramp to deal with the growing PVGR. Further, the installed nameplate for PVGR and wind keeps growing faster than the transmission [capacity] in ERCOT, leading to large curtailments on higher load days. That is a lurking reliability factor that at some point will rear its ugly head due to thermal plant outages or missed dispatches."