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ERCOT forwards widen price premiums for upcoming winter ahead of season's peak

The prices of forward strips for the upcoming winter at the power and natural gas markets in Texas have accelerated approaching the peak of the season as the state's grid operator anticipates diminished reserve margins.

Winter strip forwards are designated by their delivery years, but coverage months span January through February at the power market and November through March at the gas market.

The monthly average around-the-clock, or ATC, power forward winter strip for 2019 delivery at the ERCOT North Zone has trended higher thus far this year than in 2017, with a premium that has widened from 88 cents/MWh in January to as much as $11.91/MWh in November.

From being caught in the low to mid-$20s/MWh from January through November 2017, the ERCOT North winter strip forwards kicked off 2018 in the mid-$20s/MWh then largely spanned the high $20s/MWh as the year unfolded and reached the low to high $30s/MWh in October and November.

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At the Katy gas hub, the forward winter strip for 2018-2019 delivery has been trading lower than 2017 for seven of the last 11 months, with a spread spanning a discount of as much as 17.7 cents/MMBtu in February to a premium of $1.038/MMBtu in November.

Gas forward winter strip pricing spanned the mid-$2.80s/MMBtu to the low $3.30s/MMBtu for the first 10 months of the year but breached $4.00/MMBtu in November. In 2017, it predominantly spanned the mid-$2.90s/MMBtu to the low $3.00s/MMBtu.

These trends generally mirror activity at the spot markets, where ERCOT North day-ahead ATC spot power has consistently traded above its year-ago level from January through November and the Katy hub next-day natural gas has traded lower for six of the last 11 months but has found some upside momentum of late.

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ERCOT North spot power prices have seen a monthly average premium of $1.37/MWh to as much as $48.31/MWh thus far this year. It bottomed out at $21.77/MWh in February and peaked at $78.97/MWh in July, compared to the year-ago low and high of $19.45/MWh and $30.65/MWh, respectively, in the same months.

The July 2018 index was bolstered by the year-to-date peak of $272.66/MWh recorded July 23 as record-breaking demand on the grid combined with tight resources due to recent retirements.

The monthly spot natural gas index at the Katy hub this year has seen a discount of as much as 43.1 cents/MMBtu to its year-ago level but had also held a premium of as much as $1.086/MMBtu in November and $1.112/MMBtu in January. Its price ranged from $2.782/MMBtu to $3.234/MMBtu in January through November 2017 but spanned $2.641/MMBtu to $4.299/MMBtu over the same period this year.

Winter fundamental outlooks bullish

Projections for the upcoming winter call for colder-than-normal temperatures alongside diminished reserve capacity in Texas.

The meteorological winter, spanning December through February, will be colder than normal on the East Coast and across the South, according to The Weather Company's outlook. Todd Crawford, a senior meteorological scientist at the agency, sees "clear implications for increased heating demand" due to the cold-weather forecast.

For its part, grid operator Electric Reliability Council Of Texas Inc. expects a lower reserve margin for winter 2018-2019 than in the comparable year-ago period as diminished resources combine with increased peak demand.

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ERCOT's final seasonal assessments show a combination of forecast peak load and typical outages leaving a reserve margin of 17.2% in the 2018-2019 winter, versus the anticipated 19.9% margin in the 2017-2018 winter. ERCOT has a target reserve margin of 13.75%.

Extreme scenarios drive anticipated reserve margins below the target, but projected margins in the 2018-2019 winter are between two and three percentage points lower than the year-ago figures. Extreme load alongside typical outages is expected to result in a 5.7% reserve margin this upcoming winter, while extreme load and outages are seen driving a reserve margin of 0.2%.

Forecast total resources are down from 80,779 MW for winter 2017-2018 to 79,953 MW for winter 2018-2019, while projected peak demand is up from 61,068 MW to 61,780 MW.

Market prices and included industry data are current as of the time of publication and are subject to change. For more detailed market data, including power and natural gas index prices, as well as forwards and futures, visit our Commodities pages.