Weak natural gas prices contribute to depressed ERCOT summer power prices

New York — Despite the anticipation of another summer of record-high power burn demand in Texas, ERCOT North Hub summer packages have been trading below $100/MWh amid a weak natural gas pricing environment and other factors.

ERCOT North Hub July-August strip has been trading far under $100/MWh over the past seven days. Currently, the package is trading on the Intercontinental Exchange at an average of about $93.00/MWh. The last time the July-August strip traded above $100/MWh was on June 17, settling right around $101/MWh. For comparison, ERCOT North Hub power sat at an average of $109.55/MWh for July-August of 2019.

Though there is a noticeable decline in ERCOT summer forwards, the spot market has also been lower than historical levels. ERCOT North Hub day-ahead on-peak package has sat at an average of $24.16/MWh for the current month. This is far under the $29.51/MWh average for June 2019 and even further under the June 2018 average of $35.52/MWh.

ERCOT power prices have remained low despite record-high power burn demand expected in the region over the upcoming summer. The grid operator is projecting peakload to hit 75,200 MW, which is almost 1,500 MW under the preliminary summer assessment, but still higher than the all-time demand record of 74,820 MW set on August 12, 2019.

Increasingly, natural gas has made up a significant share of the ERCOT power generation stack this summer, due largely to low gas prices. The current month-to-date average for natural gas generation share sits at 47.1%, far higher than the year-to-date average of 42.8%.

LNG cancellations batter natural gas prices

Weak natural gas prices are expected to continue through the summer in Northeast Texas, according to S&P Global Platts M2MS forward curve data. NGPL TexOk's remainder of the summer strip, July through October, fell to an average of $1.58/MMBtu on June 23. In comparison, cash NGPL TexOk averaged $2.03/MMBtu last July through October, an expected difference of nearly 50 cents.

Similarly, Carthage Hub, which has averaged $1.52/MMBtu in the spot market so far in June, reached its weakest remainder of the summer strip prices yet on June 23. Carthage's July through October strip averaged $1.63/MMBtu on June 23, down 16 cents from the start of June and 41 cents lower than Carthage Hub's July –October 2019 average of $2.04/MMBtu.

A slew of US LNG cargo cancellations have altered the region's gas supply and demand balance for the summer. Platts Analytics estimates that over 100 cargoes have been cancelled so far for June through August loading. Global LNG spot prices were already suffering the effects of a supply glut when the novel coronavirus response put a lid on demand, pushing prices even lower.

US Southeast regional LNG demand has averaged 3.3 Bcf/d so far this June, down 68% from the region's year-to-date average of 6.88 Bcf/d and nearly 30% lower than when it averaged 4.73 Bf/d last June.

Regional gas production has not been dialed back by the same volume as the LNG cargo cancellations, resulting in a deluge of gas headed into storage. The US Energy Information Administration reported that South Central gas stocks sit at 1.173 Tcf as of June 12, which is 35.5% higher than year-ago levels of 866 Bcf and 16.4% higher than the five-year average of 1.008 Tcf.

The combination of continued lower LNG feedgas demand, building storage, and resilient production will likely keep a lid on the region's gas prices throughout the rest of the summer.

ERCOT power risks

With ERCOT power prices depressed in the current environment, it's easy to believe the spikes that occurred last summer will not occur again. However, much of the same supply issues remain. The risks associated with reliance on renewables during hot summer peaks still plague ERCOT this year, and have only been partially addressed. Nearly 99% of all added capacity this year is expected to be wind and solar energy. Though solar energy does account for the majority of incremental capacity additions, actual capacity remains below 3 GW.

Despite this risk, Platts Analytics believes forecast July and August on-peak prices will be between 14% and 19%, respectively, below current market forwards. That gap reflects the expectation that essentially all anticipated generation comes online before peak loads hit, as well as assuming an extended recovery period comparable to other regions around the country. While the risk to the upside can be extreme, the most likely scenario seems to be another summer like the more moderate 2018.