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Shortage concerns drive Texas forward summer power prices to record high

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Shortage concerns drive Texas forward summer power prices to record high

Concerns about generation shortages in the Electric Reliability Council of Texas have driven the market's power prices for the upcoming summer to record levels.

On Feb. 27, the price for on-peak power delivered during July and August 2018 reached $134.60/MWh, the highest level going back nearly six years.

Following those announcements, a December 2017 ERCOT analysis indicated Texas' wholesale power market will be below its target reserve margin of 13.75% through 2022. In 2017, the summer 2018 strip had reached a low for the year of $49.09/MWh on Sept. 18, but prices have moved higher following a pair of coal plant retirement announcements totaling 4,200 MW of capacity.

The reserve margin indicates the amount of excess capacity expected above forecast peak demand. At ERCOT's target reserve margin, blackouts due to a shortage of capacity are likely to occur once in ten years. The lower the reserve margin, the higher the probability of shortages. Low reserve margins also increase the likelihood of high prices as real-time operating reserves are more apt to fall to levels that send real-time power prices spiking toward the market's $9,000/MWh cap.

ERCOT projects its summer reserve margin to be 9.3% in 2018, before it increases to 11.7% in 2019 and 11.8% in 2020. As of Feb. 27, the higher expected reserve margins have summer 2019 and summer 2020 power prices trading at a discount to summer 2018 at $103.33/MWh and $91.12/MWh, respectively. Despite ERCOT's having projected the market's tightening in 2021 and 2022 with a respective forecast reserve margin of 11.1% and 9.0%, power prices for those periods have not responded as aggressively. As of Feb. 27, summer 2021 and summer 2022 were at $72.86/MWh and $70.85/MWh, respectively, roughly 9% to 10% higher than the level they traded at over the course of 2017.

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